Question

You bought a 10-year equipment for $10,000 for your business After using MACRS Table A-1 shown below, you took depreciations for 4 years and then you sold your equipment for $7,000. Assuming your income tax rate is 30%. Answer the following 2 questions: 1. How much is the book value of the equipment when you sold it? (20 points) 2.How much cash did you receive after paying tax when selling this equipment? (15 points) MACRS Hal Year Comvention TABLE 1 D o Rats for eryPerfod 15 e 20 Year 10 S Yea 7 Year Year 20.00 000 12 00 2449 22 00 4 4 19.20 1162 177 6713 770 1152 1249 22 731 655 23 12 a 655 446 462 656 a 10 4 6

Answer 1

1.

10-years depreciation class has 11 years of recovery. Respective depreciation rates for first 4 years are (10% + 18% + 14.40% + 11.52% =) 53.92%.

Accumulated depreciation = Cost of equipment × 53.92%

                                           = $10,000 × 53.92%

                                           = $5,392

Book value at the end of 4^th year = Cost of equipment – Accumulated depreciation

                                                      = $10,000 - $5,392

                                                      = $4,608 (Answer)

2.

Book value at the end of 4^th year is the amount which is not recovered through depreciation. This is to be subtracted from selling price for tax calculation.

Amount of tax = Selling price – Book value at the end of 4^th year

                        = (7,000 – 4,608) × 30%

                        = $717.60

Receiving of cash = Selling price – Amount of tax

                              = 7,000 – 717.60

                              = $6,282.40 (Answer)