8-31 On November4,2015, Blue Company acquired an asset(27.5-yearresidential real

ID: 2611711 • Letter: 8

Question

8-31 On November4,2015, Blue Company acquired an asset(27.5-yearresidential 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.

Cost of Asset:

Less greater of allowed and allowable cost recovery for 2015:

Less greater of allowed and allowable cost recovery for 2016:

Net recovery:

Basis at the end of 2016:

Less: Cost recovery for 2017

Basis at date of sale:

Loss (gain on sale of asset):

Cost of Asset:

Less greater of allowed and allowable cost recovery for 2015:

Less greater of allowed and allowable cost recovery for 2016:

Net recovery:

Basis at the end of 2016:

Less: Cost recovery for 2017

Basis at date of sale:

Loss (gain on sale of asset):

Explanation / Answer

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)