Question

On November 4, 2018, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2018 and 2019, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year property). Blue should have taken $910 and $7,272 of cost recovery in 2018 and 2019, respectively. On January 1, 2020, the asset was sold for $180,000. If required, round all computations to the nearest dollar.

a. The adjusted basis of the asset at the end of 2017 is $.
b. The cost recovery deduction for 2018 is $.
c. The__________ on the sale of the asset in 2018 is $

Answer 1

A. $191,818

B. $303

C. $11,515 loss

Step-by-step explanation:

A) Calculation to determine what The adjusted basis of the asset at the end of 2017 is

2017 Asset's cost $200,000

Less recovery costs for 2017 and 2018

($910 + $7,272 = $8,182

December 31, 2018 $191,818

($200,000 - $8,182)

Therefore The adjusted basis of the asset at the end of 2017 is $191,818

B) Calculation to determine what The cost recovery deduction for 2018 is

Recovery cost = $200,000 x (1 / 27.5) x (0.5 / 12)

Recovery cost = $200,000 x3.636% × .5/12)

Recovery cost = $303

Therefore The cost recovery deduction for 2018 is $303

C) the asset's basis on the date of sale is = $191,818 - $303 = $191,515

Sales price - asset basis = $180,000 - $191,515 = $11,515 loss

Blue Company lost $11,515 when it sold the asset.

$.

c. The__________ on the sale of the asset in 2018 is $