Albert's sole proprietorship owns the following assets. Albert sells his sole proprietorship for $500,000.Calculate Albert's recognized gain or loss and classify it as capital or ordinary.
A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)$110,000 ordinary income and $120,000 capital gain.

Question

Albert's sole proprietorship owns the following assets.  Albert sells his sole proprietorship for $500,000.Calculate Albert's recognized gain or loss and classify it as capital or ordinary. 
A)$230,000 ordinary income. 
B)$230,000 capital gain. 
C)$115,000 ordinary income and $115,000 capital gain. 
D)$110,000 ordinary income and $120,000 capital gain.

Quizplus · Accepted Answer

To calculate the recognized gain or loss, we need to subtract the adjusted basis of the assets from the selling price of the sole proprietorship. The adjusted basis is the original cost of the assets plus any improvements made, minus any depreciation taken.
 
Here is the calculation:
 
Selling price: $500,000
Adjusted basis: $370,000 ($300,000 + $30,000 + $40,000)        [ Original cost($300,000) + Improvements($40,000) - Accumulated Depreciation($30,000)]
 
Recognized gain: $130,000 ($500,000 - $370,000)
 
This recognized gain will be split into two parts: ordinary income and capital gain. 
 
The sale of a sole proprietorship includes both the sale of assets used in the business and goodwill. The sale of assets used in the business will generate ordinary income or loss based on the individual assets sold. In this case, the computer system ($20,000) and the delivery vehicle ($30,000) were sold, generating $50,000 of ordinary income. 
 
The remaining gain of $80,000 ($130,000 - $50,000) will be a capital gain. 
 
Therefore, the recognized gain will be split into $50,000 of ordinary income and $80,000 of capital gain, so the correct answer is D) $110,000 ordinary income and $120,000 capital gain.

Albert's Sole Proprietorship Owns the Following Assets