Firm J, an accrual basis taxpayer, recorded a $40,000 account receivable on the sale of an asset on credit. Its basis in the asset was $33,000. Two months after the asset sale, Firm J sold the receivable to a local bank for $38,000.
a. Assuming that the asset was an inventory item, determine the amount and character of Firm J’s gain or loss recognized on sale of (1) the asset and (2) the receivable.
b. Assuming that the asset was a capital asset, determine the amount and character of Firm J’s gain or loss recognized on sale of (1) the asset and (2) the receivable.