Question

A delivery truck was just purchased for $80,000. It's estimated salvage value at the end of its useful life, in 8 years, is $20,000. Assume 25% tax rate, and straight-line depreciation. a. What is the amount of annual depreciation? b. What is the book value after 6 years? C. Assuming the company decides to sell the truck after 6 years of service, and receives $50,000 from the sale, calculate the after-tax net cash inflow from the sale of the truck. Solution: a). Annual Depreciation =(Cost of the trucks-Salvage Value) Useful life years = ($80,000-$20,000)/8= $60,000/8 = $7,500 b) Book Value afer 6 years= Cost of Truck- Accumulated Depreciation = $80,000 - (6 * $7,500) = $80,000-$45,000 = $ 35,000 c) After tax salvage value= Salvage Value-(Tax Rate * (Salvage Value-Book Value) = $50,000 - (0.25*($50,000-$35,000)) = $50,000 -(0.25 * $ 15,000) = $50,000 - $3,750= $46,250.

Answer 1

Solution :

The solution is correct.

Please find a further detailed version of the solution as follows :

a.Calculation of annual depreciation as per straight line depreciation :

The formula for calculation of the annual depreciation as per straight line method of depreciation is

Annual depreciation = ( Cost of the asset – Salvage value ) / No. of years of useful life  

As per the information given in the question we have

Cost of the asset = $ 80,000 ; Salvage value = $ 20,000 ; No. of years of useful life = 8 years

Applying the above information in the formula we have

= ( $ 80,000 - $ 20,000 ) / 8

= $ 60,000 / 8 = $ 7,500

Thus the Annual depreciation as per the straight line method is = $ 7,500

b. Calculation of book value after 6 years :

The Accumulated depreciation for a period of 6 years = Annual Depreciation * No. Of years of usage

= $ 7,500 * 6

= $ 45,000

Thus the Cost of The Asset = $ 80,000                                 -   ( A )

Accumulated Depreciation for 6 Years = $ 45,000             -   ( B )

Thus Book value of the Asset after 6 years = (A ) – ( B ) =     $ 80,000 - $ 45,000 = $ 35,000

c.Statement showing calculation of after tax net cash inflow from the sale of the truck after 6 years of service :

Sl.No.	Particulars	Amount
1.	Sale value of the Asset	$ 50,000
2.	Less : Book value of the Asset	$ 35,000
3.	Profit on sale of Asset = (1) – (2)	$ 15,000
4.	Tax Rate	25 %
5.	Tax payable on profit on sale of asset = ( $ 15,000 * 0.25 )	$ 3,750
6.	After Tax salvage value = Sale value of asset - Tax payable on profit on sale of asset = $ 50,000 - $ 3,750= (1) - (5 )	$ 46,250

Thus the after tax net cash inflow from the sale of the truck after 6 years of service = $ 46,250