Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.

Question

Quizplus · Accepted Answer

To determine the amount and character of Nipher's gain recognized, we need to calculate the adjusted basis of the equipment first. 
Adjusted basis = Purchase price - Accumulated depreciation
Adjusted basis = $70,000 - $18,000
Adjusted basis = $52,000

Since the selling price is higher than the adjusted basis, Nipher has a gain on the sale. We need to determine the character of the gain based on the type of asset sold.

Since the equipment was held for more than one year and used in Nipher's business, it is considered a Section 1231 asset. The gain on the sale of a Section 1231 asset can be either ordinary or capital, depending on whether the asset was sold at a gain or loss overall in the current year.

In this case, the equipment was sold at a gain overall, so we need to compare the amount of the gain to the amount of any losses from other Section 1231 assets sold in the same year. If the gains exceed the losses, the gain will be a Section 1231 gain.

Since we don't have any information about other Section 1231 gains or losses for Nipher, we can assume that the $6,500 gain is a Section 1231 gain. The remaining $18,000 gain is ordinary income, since it represents the portion of the selling price that exceeds the adjusted basis but is not a Section 1231 gain.

Therefore, the amount and character of Nipher's gain recognized is $18,000 ordinary gain and $6,500 Section 1231 gain, which is choice D.

Several Years Ago, Nipher Paid $70,000 to Purchase Equipment to Use