Emily, an individual, began business four years ago and has never sold a Section 1231 asset. Emilyowned each of the assets for several years. In the current year, Emily sold the following businessassets.AccumulatedAssetOriginal CostGain/LossDepreciationMachinery$32,000$7,300$10,500ComputersBuilding$12,000$5,000$(2,400)$120,000$24,000$(3,000)Assume Emily's marginal ordinary income tax rate is 32%.a. Determine the character of each gain and loss.b. Complete the Section 1231 netting process and determine net section 1231 gain or loss and itsfinal character.c. Determine Emily's tax liability or tax savings for the year.

a. Determine the character of each gain and loss. b. Complete the Section 1231 netting process and determine net section 1231 gain or loss and its final character. c. Determine Emily's tax liability or tax savings for the year,

a. Determine the character of each gain and loss. b. Complete the Section 1231 netting process and determine net section 1231 gain or loss and its final character. c. Determine Emily's tax liability or tax savings for the year,

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

Emily, an individual, began business four years ago and has never sold a Section 1231 asset. Emily
owned each of the assets for several years. In the current year, Emily sold the following business
assets.
Accumulated
Asset
Original Cost
Gain/Loss
Depreciation
Machinery
$32,000
$7,300
$10,500
Computers
Building
$12,000
$5,000
$(2,400)
$120,000
$24,000
$(3,000)
Assume Emily's marginal ordinary income tax rate is 32%.
a. Determine the character of each gain and loss.
b. Complete the Section 1231 netting process and determine net section 1231 gain or loss and its
final character.
c. Determine Emily's tax liability or tax savings for the year.

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