Question

Determine the amount realized and the character by Solar Corporation on the sale of the following equipment: PV1 purchased in 2012 for $10,000 and sold for $8,000. PV1 has an adjusted basis of $5,000. PV2 purchased in 2013 for $25,000 and sold for $16,000. PV2 has an adjusted basis of $18,000. Assume Solar Corporation had ordinary income of $35,000 from all other sources and no other asset sales or transactions. How does the sale of PV1 and PV2 affect ordinary income?

Answer 1

Answer:

The effect on the sale of PV1 would be $3,000 and on PV2 it is $1,500

Explanation:

For computing the effect on the ordinary income, we have to do the following adjustment which is shown below:

PV1 = Sale price-adjusted basis

      = $8,000 - $5,000

      = $3,000

The $3,000 represent the short term capital gain, and it is a short term capital gain because the equipment is sold in less than 1 year  

PV2 = Sale price-adjusted basis

       = $16,000 - $18,000

       = - $2,000

The $ -2,000 represents the long term capital loss , and it is a long term capital loss because the equipment is sold in more than 1 year  

So, the effect on the sale of PV1 would be $3,000 and on PV2 it is $1,500 because the deduction is allowed to a maximum of $1,500