Question

Conroy corporation agrees to sell some of its excess machinery for $190,000 consisting of a $70,000 down payment in year of sale and additional payments of $60,000 in each of the next 2 years plus interest. Conroy purchased this machinery several years ago for $156,000 and had claimed accumulated depreciation of $47,000. How much income should Conroy corporation recognize in each year assuming that it uses the installment method? How does your answer change if Conroy elects out of the installment method for the sale? (2018 tax)

Answer 1

Conroy has a total gain of $81,000 [($70,000 + $60,000 + $60,000) – ($156,000 - $47,000)] on the sale of the excess machinery. Conroy must recognize the $47,000 of depreciation recapture in the year of sale in addition to 17.88% [($81,000 - $47,000)/$190,000 of each annual payment in the current and two following years. Year of sale total gain is = $59,500 [$47,000 + .1788 (70,000)]. In each of two following years, it will recognize $10,750 (.1788 x $60,000).

If Conroy elects out of the installment method for this sale, it will recognize the $47,000 of depreciation recapture and $34,000 of Section 1231 gain