Question

KTZ manufactures and distributes cutting edge hockey equipment. It has decided to streamline some of its operations so that it will be

able to be more productive and efficient. Because of this decision it has entered into several transactions during the year.

Part 1

Determine the gain/loss realized and recognized in the current year for each of these events. Also determine whether the gain/loss

recognized is §1231, capital, or ordinary.

Item

Description

A

KTZ sold an office building for $85,000 in cash. It originally bought the office building seven

years ago for $59,000 and has taken $14,000 in depreciation.

B

KTZ sold another machine for $6,200. It originally purchased this machine six months ago for

$9,000 and has claimed $1,230 in depreciation expense against the asset.

C

KTZ sold some of its inventory for $5,000 cash. This inventory had a basis of $8,000

D

KTZ held stock in XYZ Corp., which had a value of $19,000 at the beginning of the year. That

same stock had a value of $25,230 at the end of the year.

E

KTZ sold a machine that it used to make computerized dies for $26,300 cash. It originally bought

the machine for $16,200 three years ago and has taken $4,000 depreciation

Part 2

From the recognized gains/losses determined in part 1, determine the net §1231 gain/loss and the net ordinary gain/loss KTZ will

recognize on its tax return.

Answer 1

part 1

a)

KTZ sold an office building for $85,000 in cash. It originally bought the office building seven

years ago for $59,000 and has taken $14,000 in depreciation.-

Ans- Bookvalue on date of sale= $59000- $ 14000= $ 45000

Profit on sale of office building= $85000- $45000= $40000

As per section 1231, out of profit of $40,000, amount of $14000, i.e till the amount of depreciation will be an ordinary income and $26000 (40000-14000) will be considered capital income.

b)

KTZ sold another machine for $6,200. It originally purchased this machine six months ago for

$9,000 and has claimed $1,230 in depreciation expense against the asset.

Ans- As the asset was held for less than one year, the provision of section 1230 will not apply. Thus, the loss will be treated as ordinary loss. The amount of ordinary loss =cost-depreciation-salesprice=9000-1230-6200= $1570

c)

KTZ sold some of its inventory for $5,000 cash. This inventory had a basis of $8,000

Ans-Section 1230 will not be applied to inventories. Thus ordinary profit of $3000 (8000-3000) will be considered.

d)

KTZ held stock in XYZ Corp., which had a value of $19,000 at the beginning of the year. That

same stock had a value of $25,230 at the end of the year.

Ans- Stock is treated as lower of market value or cost, hence no treatment, willl be shown at $19000

e)

KTZ sold a machine that it used to make computerized dies for $26,300 cash. It originally bought

the machine for $16,200 three years ago and has taken $4,000 depreciation

Ans- Bookvalue of computer- 16200-4000= $12,200

Profit= 26300- 12200= $14100

As per section 1231, out of profit of $14,100, amount of $4000, i.e till the amount of depreciation will be an ordinary income and $10100 (14100-4000) will be considered capital income.

part 2

Net section 1231 gain=26,000 + 10100= $ $36100

Ordinary gain= 14000+3000+4000= $21000

Ordinary loss= $ 1570