Question

Norka Inc. has purchased an advanced measurement machine for research and development at a cost of $120,000. Sales tax on the machine was charged at 4%. The freight charges for the machine were $15,000. The cost of installation was $17,000. Norka depreciates the equipment using the 5-year MACRS schedule. What is the cost basis of the asset? What will be the depreciation expense for year 3? Calculate the pre-tax gain or loss on the asset disposal if the asset will be sold for $55,000 at the end of year 4.

Answer 1

Cost of Asset 1st Part Particulars Purchase cost Sales Tax 4% Freight charges Installation cost Total Cost Amount 120000 4800 15000 17000 156800 Note: It is assumed that sales tax credit not taken as input tax credit 2nd Part Depreciation expenses for 3rd year (Working Note) I,e 30106 Working Note Asset Val 5- Year MACRS% (B) Depreciation(A*B) Year end Book Value Year 156800 1 20 31360 125440 156800 2 32 50176 75264 156800 3 19.2 30106 45158 156800 18063 4 11.52 27095 9032 156800 11.52 5 18063 156800 6 5.76 9032 0 Total 156800 3rd Part Gain or (Loss)on the disposal of asset = Sale Value-Year end book Value = 55000-27095 = 27905 ,e Gain