question 18 ignoring tax consequences how should the gain or loss on disposal of an old...
question 18
ignoring tax consequences how should the gain or loss on disposal of an old machine be treated in an equipment replacement decision ?
1- used to defray installation costs of the new machine
2-deducted from the cost of the new machine
3- added to the accumulated amortization (or deducted from the cost) of the old machine
4- deducted from the accumulated amortization
5-it is irrelevant
Homework Answers
Answer
5-it is irrelevant
Explanation
When we replace the asset, we have to make investment in new asset and we will sell the old or existing asset. Therefore, initial investment after replacement is the difference between the cost of the new asset and the sale proceeds of the old assets. Therefore, whether we sell the asset at higher price than the Book Value or at Lower price than the book value is not considered. Therefore, the gain or loss on disposal of an old machine in an equipment replacement decision is irrelevant .We will deduct the actual sale proceeds from the cost of the new asset. Following formula is used for calculating the initial investment in new asset
Initial Investment in new asset
= Cost Price of the new asset – Sale Proceeds of the old asset
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question 18
ignoring tax consequences how should the gain or loss on
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Continue w/old machine
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Variable production cost
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