On April 1,2017, X Corporation, a calendar year, cash method C corporation, sold equipment that it...

On April 1,2017, X Corporation, a calendar year, cash method C corporation, sold equipment that it used for 3 years in its business operations. Under the terms of the 100,000 in 2017 (exclusive of interest, which can be ignored for purposes of this question), and will receive $200,000 in 2018, and $300,000 in 2019. X Corporation purchased the equipment on February 1, 2014 for 1,000,000. Its accumulated tax depreciation on the date of sale was $600,000, and its adjusted basis in the equipment was $400,000.

a. What is the character and amount of gain, if any, that Cedar Corporation must recognize in 2017, 2018, and 2019? Please show your work and explain your calculations.

b. What is the character and amount of gain, if any, that Cedar Corporation must recognize in 2017, 2018, and 2019 if instead of selling equipment, X Corp sold land it held for investment that had a cost and an adjusted basis of $400,000? Please show your work and explain your calculations.

Expert Solution

The equipment has been sold and the amount will be received in different years. The approach to solve this question will be very straight. first, we will calculate the total profit from selling the asset and then the gain will be distriuted among three years in the ratio of selling price because it is a cash method of accounting. Had it been the mercantile method of accouting, we would recognise the whole gain in the year of sell itself.

Futher, the gain on sale of equipment will be shown under extra ordinary items as selling assets is not an operating activities.

Calculation of profit on sale-

B). If instead of the equipment, X corp would sell the land for $600,000; book value 400,000; then the profit of 200,000 will be transferred to Other Comprehensive income as the land is held for investment with the same amounts.

ekkarill92 answered 1 year ago

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