Question

Larry Corporation purchased a new precision casting machine for its manufacturing facility. The machine cost $2 million, and another $150,000 was spent on installation. The machine was placed in service in 2009. The old machine, which was placed in service in 2003, was sold in 2009 to an unrelated party for a $250,000 financial accounting profit. What asset disposition and capital recovery issues do you need to address when removing the old machine from, and placing the new machine on, the financial accounting and tax books and in calculating the 2009 tax depreciation?

The following tax issues need to be addressed regarding Larry’s asset acquisition and disposition (assuming the corporation does not qualify for the small business exemption):

1. Old machine. Discuss at least 2 issues.

2. New machine. Discuss at least 2 issues.

3. What cost must be capitalized? Different capital recovery calculations must be made for taxable income, AMTI/ACE, and E&P purposes. Should the $250,000 financial accounting profit be adjusted to determine the gain recognized for taxable income, AMTI, ACE, and E&P purposes with respect to the old machine.

Answer 1

The existing printing press operations were well managed?

The existing operations were not well managed. The company goes to the extent of being shut down and the sales also have declined to 65%. This proves that the existing operations did not adapt to the evolutionary changes. The threat of competitors was not considered by the company ahead hence the sales also declined. The growing technology in reducing the turnaround time also was not considered by the company until the sales and business declined.

How to control the orders during the peak seasons?

During the peak season, there will be an increase in the existing orders. In order to meet the growing orders, the options would be to work overtime to ensure that the orders are delivered on time, hire more workers only for the peak season to meet the demand, and if required hire machinery and components to meet the increased orders.

What would be the options to improve the existing operations?

There are two options to improve the existing operations. Firstly, the turnaround time needs to be improved to deliver the order in the quickest time than the competitors. Since the competitors captured the company’s orders by delivering orders in quick turnaround times, the improvement has to be made in the operations/production part of the business to improve the business. Secondly, the unnecessary activities/ tasks in the process need to be cut down to produce high-quality/ high-resolution packaging materials to satisfy the major customers. Thirdly, replacement of automatic machines instead of manual ones will improve the turnaround time.

Using the auto die-cut printing machines instead of manual die-cut machines was effective for improving the existing operations?

Yes, manual work always consumes more time than the automatic machines. Hence, the company need to replace the auto die-cut printing machines instead of manual die-cut machines. Each die-cutting task took around 14 hours to be completed for one order when manual die-cut machines were used.