Question

In year O, Javens Inc. sold machinery with a fair market value of $430,000 to Chris. The machinery's original basis was $340,560 and Javens's accumulated depreciation on the machinery was $53,000, so its adjusted basis to Javens was $287,560. Chris paid Javens $43,000 immediately (in year O) and provided a note to Javens indicating that Chris would pay Javens $64,500 a year for six years beginning in year1. (Do not round intermediate computations.) a. What is the amount and character of the gain that Javens will recognize in year 0? b. What amount and character of the gain will Javens recognize in years 1 through 6? Complete this question by entering your answers in the tabs below Req A Req B What is the amount and character of the gain that Javens will recognize in year 0? Description Amount Recognized Gain Character of Recognized Gain: Ordinary Gain $1231 gain Req A Req B

Answer 1

In year 0, Javens Inc. recognizes a gain of $142,440, which is characterized as Section 1231 gain. For years 1-6, the gain recognized each year will be based on the payments received from Chris, needing further calculation based on the installment sale method.

Step-by-step explanation:

To calculate the amount and character of the gain that Javens Inc. will recognize in year 0, we first determine the selling price. The initial cash payment is $43,000, and there will be six annual payments of $64,500. However, the selling price for gain calculation is simply the fair market value, which is $430,000. Javens's adjusted basis is the original basis minus accumulated depreciation, which is $340,560 - $53,000 = $287,560. Consequently, the recognized gain in year 0 would be the selling price minus the adjusted basis: $430,000 - $287,560 = $142,440. The character of the recognized gain will depend on the type of property involved and how long it was held, but typically, the sale of machinery by a business will generate a Section 1231 gain, which can be ordinary or capital depending on the specifics.

For years 1 through 6, Javens will recognize gain annually as Chris makes payments on the note. We would typically allocate part of each payment to interest and part to principal, and the gain recognized would be in proportion to the principal received, relative to the total gain. However, since we do not have an interest rate to calculate the interest portion of the payments, we will assume for simplicity that the entire payment is principal. Therefore, each payment of $64,500 may be expected to result in additional gain recognition, but the specific amount would need to be calculated based on an appropriate method such as the installment sale method.