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Comprehensive Problem for Chapters 7 and 8. Sam Johnson started a
small machine shop, Machines, Inc., in his garage and incorporated it in
March of 2013 as a calendar-year corporation. At that time, he began
using his personal computer and tools solely for the business as part of
his contribution to the corporation. The computer cost $2,700 but had a
fair market value of only $900 at conversion and the tools, which had
cost $1,500, were valued at $1,100. During 2013, Machines, Inc.
purchased two machines: Machine A, purchased on May 2, cost $24,000;
Machine B, purchased on June 5, cost $40,000.
The corporation expensed Machine A under Section 179. The computer,
tools, and Machine B were depreciated using accelerated MACRS only.
The corporation did not take any depreciation on the garage nor did Sam
charge the business rent because the business moved to a building the
business purchased for $125,000 on January 5, 2014. On January 20,
2014, Machines purchased $4,000 of office furniture and on July 7, it
purchased Machine C for $48,000. It depreciated these assets under
MACRS (including allowable bonus depreciation), but did not use
Section 179 expensing. Machines acquired no new assets in 2015.
On February 4, 2016, Machines bought a new computer system for
$5,100. It sold the old computer the same day for $300. On March 15, it
sold Machine A for $6,000 and purchased a more versatile machine for
$58,000. On August 15, Machines sold bonds it had purchased with
$9,800 of the cash Sam had originally contributed to the corporation for
$10,400 to pay creditors. The business takes only the maximum
allowable MACRS depreciation deduction on assets purchased in 2016
with no Section 179 expensing or bonus depreciation.
Determine Machines, Inc.'s depreciation expense deductions for 2013
through 2016.
Determine the realized and recognized gains or losses on the property
transactions in 2016.
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