Question

Eleven years ago, Lynn Inc. purchased a warehouse for $315,000. This year, the corporation sold the warehouse to Firm D for $80,000 cash and D’s assumption of a $225,000 mortgage. Through date of sale, Lynn deducted $92,300 straight-line depreciation on the warehouse.a. Compute Lynn’s gain recognized on sale of the warehouse.b. What is the character of this gain?c. How would your answers change if Lynn is a noncorporate business?

Answer 1

gain recognized on sale = $82,300

ordinary gain = $16,460

capital gain = $65,840

gain is $82,300

Step-by-step explanation:

given data

purchased a warehouse = $315,000

sold warehouse = $80,000

assumption of a mortgage = $225,000

deducted = $92,300

solution

first we get here Actual cost of warehouse that is

Actual cost of warehouse = Purchase cost - Depreciation ..................1

put here value and we get

Actual cost of warehouse = $315,000 - $92,300

Actual cost of warehouse = $222,700

and

now we gain recognized on sale that is express as

gain recognized on sale = Sale price of warehouse + mortgage amount - actual cost ..........................2

put here value and we get

gain recognized on sale = $80,000 +$225,000 - $222,700

gain recognized on sale = $82,300

and

now we get first we get ordinary gain and we know ordinary gain is the 20% of the gain amount

as the tax rate is 20%

so ordinary gain is

ordinary gain = $82,300 × 20%

ordinary gain = 16,460

so here capital gain will be

capital gain = Gain - Ordinary gain ...................3

put here value

capital gain = $82,300 - $16,460

capital gain = $65,840

and

when Lynn is a non corporate business than he will have only gain part of $82,300 because here ordinary gain and capital gain is not recognized under non corporate business

so gain is $82,300