On November 4, 2015, Blue Company acquired an asset (27.5-year residential real

Question

On November 4, 2015, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2015 and 2016, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year assets). Blue should have taken $910 and $7,272 cost recovery in 2015 and 2016, respectively. On January 1, 2017, the asset was sold for $180,000. Calculate the gain or loss on the sale of the asset for that year.

Explanation / Answer

SOLUTION

Amount ($) Cost of asset 200,000 Less: Greater of allowed and allowable cost recovery: 2015 :$910 2016 : $7,272 (8,182) Basis at the end of 2016 191,818 Less: Cost recovery for 2017 ($200,000 * 3.636% * .5/12) (303) Basis on date of sale 191,515 Loss on sale of asset ($180,000 - $191,515) (11,515)

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