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

question 103

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

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Definitions:

Debt Investments

Investments made by purchasing bonds or other debt instruments, with the expectation of earning interest income and the return of principal.

Net Income

The amount of profit left after all operating expenses, taxes, and interest are deducted from total revenue.

Interest Receivable

An asset account on the balance sheet representing the amount of interest income that has been earned but not yet received in cash.

Interest Revenue

Income earned by lending funds or allowing another entity to use your funds, such as interest from savings accounts, bonds, or loans receivable.