QUESTION 1 A piece of equipment is bought for $70,000 and is depreciable, with a

Question

QUESTION 1

A piece of equipment is bought for $70,000 and is depreciable, with a salvage value of $2,000. This equipment uses a 7 year MACRS schedule. The equipment is sold in year 5 for $35,000. Note that with MACRS salvage, and depreciation in the year sold, are treated differently than other methods.

A) What is the Book Value of the equipment in year 5? (note that the equipment is sold in year 5)

B) For the same problem above, what is the taxable income for this project in year 5 if the equipment is sold for $35,000?

C) For the same problem above, what are the taxes owed for this equipment sale in year 5 if the company is in the 36% corporate tax bracket?

Explanation / Answer

Strightline method of Depreciation
1 Cost Equipment $ 70,000.00
2 Salvage value $ (2,000.00)
3=1-2 Book value for depreciation $ 68,000.00
4 Life of Asset
5=3/4 Depreciation per year $ 9,714.29
6=5*5 Depreciation upto 5 th year $ 48,571.43
7=3-6 Book value $ 19,428.57
8 Sale value $ 35,000.00
9=8-7 Gain on sale $ 15,571.43
10 tax @36% $ 5,605.71

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