Consider a 5 year MACRS depreciating asset (see page 318 in your book for the table)....

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Consider a 5 year MACRS depreciating asset (see page 318 in your book for the table)....

Consider a 5 year MACRS depreciating asset (see page 318 in your book for the table). The initial value of the asset is $40,000 and will have a salvage value of $21,000 in three years. Find the gain or loss amount at the end of 3 years (consider a half-year convention for year 3).

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Answer 1

Answer #1

Tax rate		36%
Calculation of annual depreciation

Depreciation		Year-1	Year-2	Year-3	Total
Cost		$ 40,000	$ 40,000	$ 40,000
Dep Rate		20.00%	32.00%	9.60%
Depreciation	Cost * Dep rate	$ 8,000	$ 12,800	$ 3,840	$ 24,640

Calculation of after-tax salvage value
Cost of machine			$ 40,000
Depreciation			$ 24,640
WDV	Cost less accumulated depreciation	$ 15,360
Sale price			$ 21,000
Profit/(Loss)	Sale price less WDV		$ 5,640
Tax	Profit/(Loss)*tax rate	$ 2,030
Sale price after-tax	Sale price less tax		$ 18,970

Gain after tax	5640-2030		$ 3,610

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Answer 2

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