34- ok fine so they f’d and put 60 not 45 in the q- if i follow the answer though and do it with the 45 number- my questions- where do they get the $32 mil left on the mortgage balance from? bonus question if everyone’s not sick of my questions yet- **When net selling price > original cost, recaptured depreciation = accumulated depreciation what happens if net selling px < original cost… then what does recaptured depreciation equal in general? Exam 3 Morning Page: 158 - Omission In the vignette for questions 19-24 related to Cummings Enterprises, Inc., we inadvertently omitted the information needed to calculate the CEI’s WACC of 8 percent. Posted: 2008-05-12 Selling price $45,000,000 Cost of sale (3,150,000) Net selling price $41,850,000 Purchase price $40,000,000 Less accumulated depreciation* (6,250,000) Adjusted basis (book value) $33,750,000 Realized gain on sale $8,100,000 Recaptured depreciation** ($6,250,000) Long-term capital gain $1,850,000 Tax on recaptured depreciation ($6,250,000 × 0.28) $1,750,000 Tax on long-term capital gain ($18,500,000 × 0.15) $277,500 Total tax due on property sale $2,027,500 *Accumulated depreciation = 5 × $1,250,000 = $6,250,000 **When net selling price > original cost, recaptured depreciation = accumulated depreciation Net selling price $41,850,000 Outstanding mortgage balance (32,000,000) Pre-tax sales proceeds $9,850,000 Less total tax on property sale (2,027,500) Equity reversion after tax $7,822,500 (Study Session 13, LOS 51.c)
They financed 80% of the 40m purchase with an IO loan which they paid back at the end. For recap, check if the selling price is above the book value. If you bought the property for 40, depreciated it to 30 and then sold it at 35, you recapture 5. T/G
I got this question wrong. I didn’t realize where they got the remaining mortgage balance until just now looking at it (I feel like an idiot and so will you). PG. 164 “Sentry has arranged to finance the investment with a 30 year 7% INTEREST ONLY loan with a face value of 80% of the initial investment.” You haven’t paid off any of the mortgage. $40,000,000*.8 = $32,000,000 mortgage balance.
thanks T/G! what if you bought at 40, depreciated to 30, and sold at 25 (for a 5 loss)- do you not need worry about any sort of recapture then since you lost $$?
yeah, if that had principal also on the mortgage, trying to figure out the mortgage balance after 5 yrs would be a biyatttch. smart of schweser to make it an IO!
bannisja, you got it, there is nothing to recap if you sell at a loss. T/G