posted by Elizabeth on .
Sam Johnson started a small machine shop, Machines, Inc., in his garage and incorporated it in March of 2002 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 $900 only at conversion, and the tools, which had cost $1,500, were valued at $1,100. During 2002, Machines, Inc. purchased two machines, Machine A purchased on May 2 cost $24,000 and 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, but no bonus depreciation was included. The corporation did not include any depreciation on the garage nor did Sam charge the business rent because the business moved to another building the corporation purchased for $125,000 on January 5, 2003. On January 20, 2003, Machines, Inc. purchased $4,000 worth of office furniture and on July 7, it purchased Machine C for $48,000. It depreciated these assets under MACRS but did not use either Section 179 expensing or bonus depreciation. Machines, Inc. acquired no new assets in 2004.
On February 4, 2005, Machines, Inc., 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, Inc., sold bonds it had purchased with $9,800 of the cash Sam originally contributed to the corporation for $10,400 to pay creditors. The business takes the maximum allowable depreciation deduction on assets purchased in 2005 but does not use Section 179 expensing.
a. Determine Machines, Inc.'s depreciation expense deductions from 2002 through 2005.
b. Determine the realized and recognized gains or losses on the property transactions in 2005.
Provide rationales to justify your answer.