In 1980,Artima Corporation purchased an office building for $400,000 for use in its business.The building is sold during the current year for $550,000.Total depreciation allowed for the building was $350,000; straight-line would have been $320,000.As result of the sale,how much section 1231 gain will Artima Corporation report?
A)$350,000
B)$406,000
C)$320,000
D)$500,000

Question

Quizplus · Accepted Answer

To calculate the section 1231 gain, we need to compare the selling price of the building to its adjusted basis. The adjusted basis is the original purchase price minus the depreciation taken on the building. So, Artima Corporation's adjusted basis is $400,000 - $350,000 = $50,000.

Since the selling price of the building is higher than the adjusted basis, there is a section 1231 gain. The amount of the gain is the excess of the selling price over the adjusted basis. Thus, the section 1231 gain is $550,000 - $50,000 = $500,000.

However, we also need to consider the depreciation difference between actual and straight-line. Since actual depreciation exceeded straight-line depreciation by $30,000 ($350,000 - $320,000), there is $30,000 of recapture under section 1245. This amount reduces the section 1231 gain, resulting in a net section 1231 gain of $500,000 - $30,000 = $470,000.

Note: Choice A is incorrect because it only represents the total depreciation allowed on the building. Choice C is incorrect because it only represents the straight-line depreciation that could have been taken on the building. Choice D is incorrect because it does not take into account the adjusted basis or the depreciation difference.

In 1980,Artima Corporation Purchased an Office Building for $400,000 for Use