Alpha Sold Machinery, Which It Used in Its Business, to Beta

question 64

Multiple Choice

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000.Beta used the machinery in its business. Alpha bought the machinery a few years ago for$50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

• A) $20,000 ordinary gain.
• B) $20,000 ordinary income under §1239.
• C) $20,000 capital gain.
• D) $10,000 ordinary gain and $10,000 §1231 gain.
• E) None of the choices are correct.

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Definitions:

Absorption Costing

A method of inventory costing in which all costs of production (both variable and fixed) are treated as product costs.

Cost Of Goods Sold

An accounting term representing the direct costs attributable to the production of goods sold by a company, including materials and labor.

Fixed Manufacturing Overhead

Costs in manufacturing that do not vary with the level of production, such as rent, depreciation, and salaries.

Inventories

Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials to be consumed in the production process.