An asset was purchased three years ago for $120,000. It falls into the five-year

Question

An asset was purchased three years ago for $120,000. It falls into the five-year category for MACRS depreciation. The firm is in a 35 percent tax bracket. Use Table 12–12.

b. Compute the gain and related tax on the sale if the asset is sold now for $51,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)
  

Tax loss on the sale ____ Tax benefit ____ Table 12-12 Depreciation percentages (expressed in decimals) Depreciation Year 5-Year 3-Year MACRS MACRS MACRS MACRS MACRS MACRS 7-Year 10-Year 15-Year 20-Year 0.200 0.320 0.192 0.115 0.115 0.058 0.143 0.245 0.175 0.125 0.089 0.089 0.089 0.045 0.100 0.180 0.144 0.115 0.092 0.074 0.066 0.066 0.065 0.065 0.033 0.050 0.095 0.086 0.077 0.069 0.062 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.030 0.038 0.072 0.067 0.062 0.057 0.053 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.017 1.000 0.445 2 3 4 8 9 15.. 16 19 20.. 1.000 1.000 1.000 1.000 1.000

Explanation / Answer

a

Total portion of property depreciation over four years is:

in the current year, the year of sale, half of depreciation is allowed.

Total depreciation = 120000 * 0.7695 = 92340

net book value of asset = 120,000 - 92,340 = 27,660

If the asset is sold for 12,560, loss on sale is = 27660 - 12560 = 15,100

Tax benefit = 15,100 * 35% = 5,285

b

if the asset is sold for 51060, gain on sale = 51060 - 27660 = 23400

Long-term capital gains are taxed at 15% if the ordinary tax bracket applicable to the taxpayer is 35%, hence, tax obligation = 23,400 * 15% = 3,510

Year Depreciation over years 1 0.2 2 0.32 3 0.192 4 0.0575 0.7695

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