Photo Tonight, a film-developing and camera-repair franchise, began business on January 1, 20X1. In the process of beginning operations, it incurred the following capital expenditures:

Developing equipment …………………………..     $80,000

Furniture and fixtures …………………………..      30,000

Small tools (under $500) …………………………..  15,000

Franchise (expires in 20 years) …………………      75,000

Incorporation costs …………………………..           5,000

Pickup truck    ……………………………….           12,000

Leasehold improvements (10-year lease)……..         30,000

The business was immediately successful and generated substantial profits for the years ended December 31, 20X1 and 20X2.

In 20X2, the truck was traded in for a larger unit costing $20,000. A value of $7,000 was assigned to the old truck when it was traded in.

In 20X3, the owner was forced to leave the business due to illness. As a result, the assets were valued and sold on December 31, 20X3, for the following values:

Developing equipment ……………………………..  $ 60,000

Furniture and fixtures ……………………………..   15,000

Small tools      ……………………………..               10,000

Franchise         ……………………………..               85,000

Incorporation costs ……………………………..       –0–

Pickup truck  ……………………………..                15,000

Leasehold improvements …………………………… 15,000

Goodwill ……………………………..                      50,000

……………………………..……………………… $250,000

Required:

Determine the effect of all these transactions on net income for tax purposes for the 20X1, 20X2, and 20X3 taxation years.