On January 2, 2018, 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, 2019, 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 for less than its original cost, there is a loss on the sale. The loss on the sale is calculated as follows:
Sale Price - Adjusted Basis = Loss on Sale
$290,000 - ($300,000 - $79,605) = $69,605
Since the loss on the sale is less than the MACRS depreciation claimed on the asset, there is an adjustment needed to current E&P. The adjustment is equal to the difference between the loss on sale and the MACRS depreciation claimed on the asset, which is $69,605 - $20,000 = $49,605. Therefore, choice B is the correct answer.

On January 2, 2018, Orange Corporation Purchased Equipment for $300,000