 Hello and welcome to the session in which we would look at this CPA simulation that deals with the selling of assets, machinery, forklift and a vehicle for a business. Those assets are section 1231 assets. That means they are used in a business and they are held more than one year. Also what you need to know about these assets, they are personal property asset, machinery, forklift, vehicle. Therefore we are dealing with section 1245 assets. So we are selling section 1245 assets and we need to know how to treat section 1245 assets whether we have a gain or a loss. So the question is this, determine the amount and the character of the recognized gain or loss for the disposition of each asset. I already told you the section 1245 assets. So you could be giving something like this in a CPA simulation where you have to have a drop down box, tell me about the gain or the loss, how much of it is taxable, how much of it is not taxable, so on and so forth and what type of, what type of character is it, ordinary capital or capital gain. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. The first thing you have to do when you are giving a problem like this is to figure out the adjusted basis because you are giving the cost of the asset, the machine we helped for four years, the cost and the depreciation of the asset of $80,000 and you are giving the selling price. So the first thing you want to find out is the adjusted basis. So the adjusted basis for the machinery is $120 the cost minus accumulated depreciation we have the adjusted basis of $40,000. Now you're going to compare the adjusted basis to how much you sold it. You sold it for $50, $50 minus $40 will give us a gain of $10. We'll come back to that gain. Let's take a look at the forklift. The cost was $50, the accumulated depreciation was $25, therefore the adjusted basis is $25. We sold it for $9, well $9 minus $25. Here we have a loss and the loss is for, if my math is right, should be $16,000. This is a loss, a loss of $16,000. The third asset, the vehicle, we held it for three years. We have a cost of $98, accumulated depreciation of $32 and adjusted basis of $66. We sold it at $40,000 minus adjusted basis of $66. We also have a loss of $26,000. So we have a gain, a loss and a loss. The question is how are we going to treat the gain and the losses? So we treat the gain. Well, here's what we have to do. The gain is $10,000 on the machinery, but here's what you have to do with the machinery. Well, you're going to say this is a bucket and this is zero and this is I sold the asset for the cost of this asset is $120,000 and I already have accumulated depreciation for this asset of $80,000. So all of this is accumulated depreciation. This is the $80,000. Now I sold this asset and I generated a gain of $10,000. Well here's what's going to happen. I'm going to have to compare the gain to the depreciation taken of $80,000. And guess what? The gain is less than the depreciation. What does that mean? It means all the gain is recaptured gain and as a result it's treated as ordinary gain. This additional gain of $10,000 is treated as ordinary income, not capital gain. Not capital gain. Why? Because it's less than the depreciation taken. Now let's assume just for the sake of illustration, I sold this asset rather than $10,000 rather than, how much I sold it for? Rather than $50,000, let's assume I sold at $490,000. If I sold this asset for $90,000, I'm going to take $90,000. So I sold it here. And the reason I'm showing you this is to show you that I sold it right here. If I sold it at $90,000. If I sold it at $90,000, I compare the $90,000 to the accumulated depreciation of $40,000 and that's going to give me gain of $50,000. So notice this is the gain for $50,000. I compare it to my accumulated depreciation of $180,000 and what I notice is it's less than the accumulated depreciation, therefore this gain is ordinary income. Let's assume I sold this asset for $150,000. Now what's special about $150,000? This is what's special about $150,000. I want you to make sure you're aware of this. $150,000 is up here. $150,000 is above the original cost. So let's do this. I sold the asset for $150,000. The basis of the asset, the basis of this asset is $40,000. My gain is $110,000. Now how do I treat this gain? Well here's what's going to happen. The amount that's above the cost, which is $30,000, which is this amount here above the original cost, is capital gain, long-term capital gain. Capital gain subject to 0, 10, sorry, 0.15 or 20%. And the $80,000 remaining, again we go back to this $80,000 of depreciation. The point I am trying to make is this. Any depreciation recapture is considered ordinary income. So this is good because I work various scenarios with you. Now the forklift, I have a loss. Well given the result of a loss, the depreciation does not apply. The depreciation recaptured, the loss is section 1231, which goes against ordinary income. The vehicle, the same thing. It's a loss. The loss is ordinary income section 1231. Assuming, let's assume there's no recaptured, there's non-recaptured section, 1231 losses of $5,000 from the prior year. Determine the amount of the gain to be treated as capital gain. There's no capital gain in this example. There's no capital gain. So we're not going to use this $5,000. There's no capital gain because the gain that we experienced by selling the forklift of $10,000, we treated it as ordinary income. And I showed you the capital gain is only usually a curve for section 1245 assets, once you sell this 1245 asset above the original cost. So this could be a CPA simulation about section 1231 assets or 1245 assets. Make sure you are comfortable with this topic. What should you do? Go to FARHAT lectures to look at additional resources, multiple choice, true, false, additional exercises that's going to help you do better. Good luck, study hard and of course, stay safe.