Question

Book value and taxes on sale of assets - Troy Industries purchased a new machine 3 years ago for $84,000. It is being depreciated under MACRS with a 5-year recovery period using the schedule. Assume 40% ordinary and capital gains tax rate.

Rounded Depreciation Percentages by Recover Year Using MACRS for First Four Property Classes

		Percentages by Recover Year*
Recovery Year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%

*These percentages have been rounded to the nearest percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purpose be sure to apply the actual unrounded percentages on directly apply double-declining balance (200%) depreciation using the half year convention.

a. what is the book value of the machine?

b. calculate the firm's tax liability if it sold the machine for each of the following amount $100,800, $58,800, $24,360 and $17,100.

Answer 1

Answer a) Book value = Book value of previous year - depreciation

Year	Depreciation rate	Depreciation	Book value
			$84,000.00
1	20%	$16,800.00	$67,200.00	84000-16800
2	32%	$26,880.00	$40,320.00	67200-26880
3	19%	$15,960.00	$24,360.00	40320-15960	Current book value at end of 3rd year
4	12%	$10,080.00	$14,280.00	24360-10080
5	12%	$10,080.00	$4,200.00	14280-10081
6	5%	$4,200.00	$0.00	4200-4200
		$84,000.00

Answer b) Tax liability = (Selling Price - Book Value)*tax rate

Selling price	Book Value	Net profit	Tax (@40%)
$1,00,800.00	$24,360.00	$76,440.00	-$30,576.00	76440*-40%
$58,800.00	$24,360.00	$34,440.00	-$13,776.00	34440*-40%
$24,360.00	$24,360.00	$0.00	$0.00	0*-40%
$17,100.00	$24,360.00	-$7,260.00	$2,904.00	(7260)*-40%