XYZ Company bought a grinding machine on 1/1/17 for $75,000. The estimated life

Question

XYZ Company bought a grinding machine on 1/1/17 for $75,000. The estimated life of the machine was 5 years. Straight-line depreciation with a S0 salvage value was used. The income tax rate is 30%. On 1/1/19 (after 2 full years), the machine was sold. 1· The net cash inflow from the sale of the machine fort $48,000 on 1/1/19 was A. $45,100 B. $46,100 C. $47,100 D. $48,100 E. $48,000 2. The net cash inflow from the sale of the machine fort $41,000 on 1/1/19 was A. $41,200 B. $42,200 C. $43,200 D. $44,200 E. $41,000 3. The net cash inflow from the sale of the machine fort $45,000 on 1/1/19 was A. $41,200 B. $42,200 C. $45,100 D. $46,100 E. $45,000

Explanation / Answer

Given the cost of the machine is $75000 as on 1/1/17

Life of the machine was 5 years

Here the tax rate is considered since it belongs to a machinery account and the taxes doesnot affect it

Depreciation is a p and l item tax to be paid after considering it even tax savings are there by depreciation should not be added to machinery

Calculation of wdv as on 31/12/2017

Depreciation as per straight line method=(cost of the asste-salvage value)/life of the asset

=$75000-0/5=$15000

WDV=cost-depreciation=$75000-$15000=$60000

WDV as on 31/12/2018

WDV=WDV as on 31/12/2017-Depreciation=$60000-$15000=$45000

In straight line method the depreciation shall be same for each year

On1/1/19

1.If the asset is sold for $48000

Profit=sale value-wdv of the asset=$48000-$45000=$3000

Capital gain tax=$3000*30%=$900

Net cash inflow=$48000-$900=$47100

Option C is correct

2.If the asset is sold for $41000

Net loss=$45000-$41000=$4000

Since no tax is attracted for loss then the net cash inflows =$41000

Hence option E is correcr

3.If the asset is sold for $45000

No profit no loss situation existes and no capital gain tax attracts

Hence net cash inflows=$45000

Option E is correct

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