Question

Chester has spent the last several years running the tugboat operation by himself and is now tired of the late nights and bad weather. So, he has decided to retire and sell the American Queen to a wealthy overseas investor. The sales price is agreed as $2,160,000 for the boat. After some negotiations, Chester agrees to sell the equipment with the boat for a total price of $2,260,000. Chester had to pay a 5% commission on the total price to the broker who helped arrange the sale. The sale occurs on November 15, 2020.

He had purchased it for $1,995,900

Calculate and explain your conclusions for the amount and character of the gain or loss on the sale assuming the boat was placed in service on June 15, 2017 Show your calculations and explain each one.

Calculate and explain your conclusions for the amount and character of the gain or loss on the sale assuming the boat was placed in service on October 12, 2017 (i.e. question 2 above). Show your calculations and explain each one.

Answer 1

As boat comes under category of ships, as per tax provisions depreciation has to be provided @40% As the boat was placed in the service from june2017 it is used for more than 180days depreciation has to be provided for full year in the year 2017 and upto 2019 and for 11.5months in the year 2020

So deprecation for 2017= $798360

For 2018= $479016

For 2019= $287410

For 2020= $165261

Balance as on 15th Nov 2020 will be $265814

As the boat sold for $2260000 5% will be paid as commission I.e $113000 so profit will be $2260000-$113000-$265814 I.e $1861186