Alpha Sold Machinery That It Used in Its Business to Beta

question 113

Multiple Choice

Alpha sold machinery that it used in its business to Beta, a related entity, for $40,400. Beta used the machinery in its business. Alpha bought the machinery a few years ago for $49,600 and has claimed $30,400 of depreciation expense. What is the amount and character of Alpha's gain?

• A)$21,200 ordinary income under §1239.
• B)$10,000 ordinary gain and $11,200 §1231 gain.
• C)$21,200 §1231 gain.
• D)$21,200 capital gain.
• E)None of the choices are correct.

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Definitions:

Sunk Costs

Sunk costs are past expenditures that cannot be recovered and should not affect future business decisions since they remain the same regardless of the outcome.

Cost of Goods Manufactured

The total cost incurred to manufacture products, including materials, labor, and overhead, during a specific period.

Finished Goods Inventory

Refers to products that have completed the manufacturing process but have not yet been sold.

Variable Costs

Expenses that vary in direct relation to the volume of production or sales transactions.