Rosie has owned a successful luncheonette for several years. Tired of the long hours and eager to try another way of life, she decides to buy a fishing boat and start a charter service near Key West. The only obstacle is the sale of the following assets of the luncheonette to fund her fishing boat endeavor:

* The adjusted basis is $6,600 if the straight-line method is used
Hank, Rosie's part-time cook, offers her $175,000 for the luncheonette, which Rosie believes is a fair price. However, she is concerned about the tax consequences of the sale. For example, she wonders how to allocate the sales price among the assets to receive the most advantageous tax results. Make reasonable recommendations to Rosie, and explain the tax effects of structuring the sale according to your recommendations.

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Date Acquired 1/12/86 1/12/86 Adjusted Basis S 5,000* $10,000 7,800 S 5,000 Original Cost $50,000 $10,000 $25,000 S 5,000 Asset Building an Equipment Supplies Current Year