On January 2, 2011, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2012, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

Question

Quizplus · Accepted Answer

Since the equipment was sold before the end of its useful life, a recapture of depreciation needs to be accounted for. The difference between the sale price of $290,000 and the adjusted basis of $220,395 ($300,000 - $79,605 in depreciation claimed) results in a gain on the sale of $69,605. This gain must be included in E&P as it is not yet recognized for tax purposes. Therefore, taxable income must be decreased by the amount of depreciation claimed ($79,605) and increased by the gain on the sale ($69,605), resulting in a net decrease of $49,605.

On January 2, 2011, Orange Corporation Purchased Equipment for $300,000