In July of 2009, Mr. Mann, a sole proprietor who performs excavating services, p
ID: 2485715 • Letter: I
Question
In July of 2009, Mr. Mann, a sole proprietor who performs excavating services, purchased and put to use for business a piece of heavy equipment for $36,500. This piece of equipment was depreciated using the MACRS 150% DB method of depreciation over the useful period of 7 years. No salvage value was approximated and applied to the appreciable basis of this equipment. Freight and installation charges for this equipment totaled $1500. Mr. Mann sold this piece of equipment for $31,500 in June of 2011. For this task, define capital asset and discuss the purpose of depreciation of assets, and why depreciation directly affects valuation of the asset at disposal. Based on the information provided, determine the amount of capital gain or loss Mr. Mann incurred through this transaction. Be certain to detail your calculations for depreciating the equipment, and how this impacts the capital gain or loss associated with the disposal of this capital asset. Explain how any gain on this asset will impact the tax obligation for Mr. Mann as the proprietor.
Explanation / Answer
Capital asset is defined as an asset which remains useful in business for a long period of time.It is investment made by owner in business which helps in generating revenue over the life of business
Depreciation iss defined as fall in value of asset over its usefull life.
Purpose of depreciating an asset is that, over the life of asset its value decreases on account of normal wear & tear, change of technology, technology becoming obsolete & related issues.
Recording of depreciation helps a business to identify what may be its expected value when sold. Depreciation gradually records loss on account of fall in value of asset, so that when asset is sold it is represented at its epected price of sale.
Now, capita gain can be calculated as = Sale price - Book Value as on date of sale
Book Value is calculated as
Sale price = 31500
Book Value as on date of sale = 23458.33
Capital Gain = 8041.67
Cost of asset Year / opening Book Value Depreciation rate Depreciation Accumulated Closing expense depreciation Book Value 2009 -10 38000 21.43% 8143.40 8143.40 29856.60 2010 - 11 29856.60 21.43% 6398.27 14541.67 23458.33 cost off asset will include cost +freight & installation charges Normal Depreciation under straight line method = cost of asset / life of asset = 38000 / 7 = 5430 (Rounded off) Depreciation Rate ( 150 Double declining method) = 1.5 x Normal depreciation / Cost of asset = 1.5 x 5430 / 38000 21.43%Related Questions
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