Choice "b" is correct. When property is sold, the realized gain is the difference between the proceeds and the adjusted basis, in this question, the difference between the $37,000 and $9,300 ($30,000 - $20,700), or $27,700. Under Section 1245 (office furniture qualifies as Section 1245 property because it is not real property), the total depreciation deducted will be recaptured as ordinary income, and the remainder (any amount in excess of the original cost) will be Section 1231 (taxed as a long-term capital) gain. In this question, the $20,700 of depreciation deductions is ordinary income and $7,000 ($37,000 - $30,000) is Section 1231 (taxed as a long-term capital) gain.

[Note: Section 1245 actually requires that the lesser of the depreciation taken ($20,700) or the gain recognized ($37,000 - an assumed $9,300 = $20,700) be recaptured. Normally, the two steps of the formula produce the same result.]

Choice "a" is incorrect. The $0 indicates that nothing will be long-term capital gain. Any amount of the proceeds over the original cost (in this question $7,000) will be Section 1231 (taxed as a long-term capital) gain.

Choice "d" is incorrect. The $20,700 is the total depreciation deduction. Normally, that would be the depreciation recaptured. However, in this question, the office furniture, for some reason, is sold for more than the original cost, and there will be Section 1231 gain.

Choice "c" is incorrect. The $27,700 is the entire gain recognized on the transaction. For that amount to be Section 1231 (taxed as a long-term capital) gain, depreciation recapture would have to be ignored.