Question

a. Your firm purchased equipment costing $300,000 1 year ago. The firm also incurred shipping costs of $18,000 and installation costs of $2,000. The IRS allows this category of equipment to be depreciated over 4 years. The equipment is expected to sell for $40,000 today. What is the book value of the asset at the time of the sale?

b. An asset was purchased for $300,000 originally. Each year for the past 8 year, depreciation has been recorded which results in the asset having a current book value of $180,000. Now your firm is selling the asset for $145,000. What will be the total tax burden (or tax credit) caused by this sale? If it is a tax burden, enter the number as a positive number. If it is a tax credit, enter the number as a negative number. Assume a tax rate of 40%.

c. A piece of equipment was originally purchased 5 years ago for $400,000 and is now being sold for $320,000. Yearly depreciation of $30,000 has been recorded. Based on a gain of $70,000, $17,000 is now owed in taxes. What will be recorded as the net proceeds from this sale?

Answer 1

Answer A
Purchase Amount	3,00,000
Shipping Cost	18,000
Installation Cost	2,000
Depreciable Cost	3,20,000
Yearly Depreciation	Cost of assets/No. of year
	320000/4
i.e.	80000
Book value =	Total Cost - (Yearly depreciation*No. of year)
	i.e. 320000 - (80000*1)
Book Value	240000
Note: There is no effect of expected sale value on calculation of Book value
Answer B
Sale of Assets	1,45,000
Book Value	1,80,000
Net gain (Net Loss)	-35,000
Tax @40%	-14,000
It is a tax cedit	-14,000
Answer C
Net proceeds from sale is always recorded at sale value less other expense to sale that assets
the tax effect on the same is shown in P&L
Therefore the net proceeds from sale here is $3,20,000