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Problem 14-86 (b) (LO. 9)

Griffin sold three items of business equipment for a total of $144,000. None of the equipment was appraised to determine its value. Griffin's cost and adjusted basis for the assets are shown below.

Asset Cost Adjusted Basis Equipment1 $63,800 $40,000 Equipment 2 34,800 32,000 Equipment 3 46,400 22,000 Total $145,000 $94,000

Griffin has been unable to establish the fair market values of the three assets. All he can determine is that combined they were worth $144,000 to the buyer in this arm's length transaction. How should Griffin allocate the sales price and figure the gain or loss on the sale of the three assets?

a. First, Griffin must consider that all of the equipment depreciation taken is subject to recapture as ordinary income due to 1245. If the equipment is sold for more than what was paid for it, the excess of the selling price over the original cost is treated as 1231 gain. Feedback Check My Work Depreciable property and real property used in business are not capital assets. Thus, the recognized gains from the disposition of such property (principally machinery, equipment, buildings, and land) would appear to be ordinary income rather than capital gain. Due to 1231, however, net gain from the disposition of such property is sometimes treated as long-term capital gain. A long-term holding period requirement must be met; the disposition must generally be from a sale, exchange, or involuntary conversion; and certain recapture provisions must be satisfied for this result to occur. b. If Griffin allocates one-third of the selling price to each asset, determine the gain or loss. Do not round your intermediate computations. If required, round your final answers to the nearest dollar. Allocated Adjusted Basis Asset Sale Price Difference Gain or Loss Equipment $40,000 1 Equipment 2 32,000 Equipment 22,000 3 Total $144,000 $94,000 Feedback Check My Work Incorrect c. If Griffin allocates the $144,000 selling price to each asset based on its relative original cost, determine the gain or loss. In your computation round any division to two decimal places. If required, round your final answer to the nearest dollar. Allocated Adjusted Basis Asset Sale Price Difference Gain or Loss Equipment 1 $40,000 Equipment 32,000 2 Equipment 3 22,000 Total $144,000 $94,000 $ Feedback Check My Work Incorrect d. If Griffin allocates the $144,000 selling price to each asset based on its relative adjusted basis, determine the gain or loss. In your computation round any division to six decimal places. Then, round your final answer to the nearest dollar. Allocated Adjusted Basis Asset Sale Price Difference Gain or Loss Equipment $ $40,000 1 Equipment 2 32,000 Equipment 3 22,000 Total $144,000 $94,000

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