A corporation sold a warehouse during the current year. The straight-line depreciation method was used. Information about the building is presented below: How much gain should the corporation report as section 1231 gain?
A)$124,000
B)$620,000
C)$586,000
D)$710,000

Question

A corporation sold a warehouse during the current year. The straight-line depreciation method was used. Information about the building is presented below:  How much gain should the corporation report as section 1231 gain?
A)$124,000 
B)$620,000 
C)$586,000 
D)$710,000

Quizplus · Accepted Answer

To determine the gain on the sale of the warehouse, subtract the accumulated depreciation from the sale price. Accumulated depreciation is equal to the original cost ($2,000,000) divided by the useful life (40 years) multiplied by the number of years of depreciation (35 years). Accumulated depreciation = ($2,000,000/40) x 35 = $1,750,000. The gain on the sale is equal to the sale price ($2,336,000) minus the adjusted basis ($250,000) minus the accumulated depreciation ($1,750,000). Gain = $2,336,000 - $250,000 - $1,750,000 = $336,000. This gain is a section 1231 gain because it is from the sale of a depreciable asset used in the taxpayer's trade or business. Therefore, the corporation should report $586,000 ($336,000 x 1.75) as section 1231 gain after recapturing the ordinary gain.

A Corporation Sold a Warehouse During the Current Year