Two years ago, Orange County Corporation bought a delivery truck for $30,000 (not subject to the luxury auto depreciation limits). Orange County used MACRS 200 percent declining balance and the half-year convention to recover the cost of the truck, but it did not elect §179 expensing or eligible bonus depreciation.
Answer the questions for the following alternative scenarios.
a. Assuming Orange County used the truck until March of year 3, what depreciation expense can it claim on the truck for years 1 through 3?
b. Assume that Orange County claimed $18,500 of depreciation expense on the truck before it sold it in year 3. What is the amount and character of the gain or loss if Orange County sold the truck in year 3 for $17,000, and incurred $2,000 of selling expenses on the sale?
c. Assume that Orange County claimed $18,500 of depreciation expense on the truck before it sold it in year 3. What is the amount and character of the gain or loss if Orange County sold the truck in year 3 for $35,000, and incurred $3,000 of selling expenses on the sale?
2. Wadsworth Corporation sold (or exchanged) some manufacturing equipment in year 0. Wadsworth bought the machinery several years ago for $65,000 and it has claimed $23,000 of depreciation expense against the equipment.
a. Assuming that Wadsworth receives $50,000 in cash for the equipment, compute the amount and character of Wadsworth's recognized gain or loss on the sale.
b. Assuming that Wadsworth receives like-kind equipment with a fair market value of $50,000 in exchange for its equipment, compute Wadsworth's gain realized, gain recognized, deferred gain, and basis in the new equipment.
c. Assuming that Wadsworth receives $20,000 in cash in year 0 and a $50,000 note receivable that is payable in year 1, compute the amount and character of Wadsworth's gain in year 0 and in year 1.