Question

1. Al received a parcel of land from his Uncle Ed as a gift. Ed had purchased the land for $400000 in 2015. Al sold the land for $480,000 the day after he got it. The terms of the sale were $50,000 cash, inventory worth 30,000 and a small warehouse with a fair value of $400,000. The cash is to be paid in equal annual installments of $10,000 for 5 years. The inventory will be delivered next year around June The warehouse will be delivered immediately.

Write a memo that will tell Al of his Gain or Loss and the nature of said gain or loss. Also when the gain will be recognized.

2. Nancy sold a piece of business equipment she put into use five years ago for $20,000. The equipment had originally cost $300,000 and Nancy had taken tax depreciation of $290,000 over the five years. The remaining ten thousand was intended to be salvage value. Explain to Mary the nature of her gain or loss. Be complete in your answer.

Answer 1

the value of land in 2015 that AI has received = 400000

the value he got after the sale = 480000

AI has received it as a gift. So, his total profit as of now is 4,80, 000

but he the terms of sale are different

there will be no profit in the receipt of cash of $50000, the inventory would be received in the next year but if the fair market value is incresed the inventory receipt would be a gain or else loss and the warehouse worth 4,00,000 is received immediately and he can have this value to be increased or decreased but as of now he is in gain.

nancy case:

actual equipment value = 300000

depreciation for 5 years after reducing the salvage value :

300000-10000 = 290000

290000/5= 58000 per year

now the present value of equipment is 10000

she sold for 20000

she has a gain of $10000 (20000-10000).