Question

Moab Inc. manufactures and distributes high-tech biking gadgets. 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. (Do not round intermediate computations.)

Moab Inc. sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 depreciation.

Moab Inc. held stock in ABC Corp. which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year.

Moab Inc. sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000.

Moab Inc. disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in depreciation.

Moab Inc. sold some land held for investment for $28,000. It originally bought the land for $32,000 two years ago.

Moab Inc. sold another machine for a note payable in four annual installments of $12,000. The first payment was received in the current year. It originally bought the machine two years ago for $32,000 and has claimed $9,000 in depreciation expense against the machine.

Moab Inc. sold stock it held for eight years for $2,750. It originally purchased the stock for $2,100.

Moab Inc. sold another machine for $7,300. It originally purchased this machine six months ago for $9,000 and has claimed $830 in depreciation expense against the asset.

Determine the gain/loss realized and recognized in the current year for each of the events provided above. Also determine whether the gain/loss recognized is 51231, capital, or ordinary. (Do not round intermediate computations.)

Answer 1

The gain or loss recognized by Moab Inc. varies with each transaction. These include section 1231 gains (like the sale of machinery used for more than a year), capital gains or losses (like the sale or unrealized increase of stock), and ordinary income or losses (like inventory sales or machinery sold before a year). Each transaction needs separate analysis to determine the correct gain or loss and its tax characterization.

Step-by-step explanation:

Loss Recognition:

When analyzing the transactions made by Moab Inc., it is crucial to calculate the gain or loss recognized for each and categorize them as either section 1231, capital, or ordinary gains or losses. Here are the assessments: Machine sold for $27,300, purchased for $19,200 and depreciated by $8,000. The gain recognized is $16,100 ($27,300 selling price - $11,200 adjusted basis). This is a section 1231 gain if used in the business for more than one year. ABC Corp. stock increased in value from $12,000 to $15,230. This is an unrealized capital gain, as no sale occurred.

Inventory sold for $7,000, with a basis of $5,000. The recognized gain is $2,000, which is ordinary income. Office building swap plus cash: Disposed at $75,000 (FMV) for one costing $62,000 with $15,000 depreciation. Adjusted basis is $47,000. Recognized gain is $28,000 ($75,000 FMV - $47,000 adjusted basis), categorized as a section 1231 gain.