Question

The original cost of the machine was $1,800,000. The machine has a class life of 15 years, but after 13 years, the firm has decided to sell the machine for $320,000. If Monster Potato has a marginal tax rate of 21%, what is the tax effect associated with the decision?

Answer 1

Answer: $16,800 tax payment.

Explanation:

Annual depreciation on machine = $\frac{1,800,000}{15}$

= $120,000

Accumulated Depreciation in 13 years;

= 120,000*13

= $1,560,000‬

Book Value at 13 years

= 1,800,000 - 1,560,000‬

= $240,000

Company sold it at a higher price than its book value so there will be a capital gain of;

= 320,000 - 240,000

= $80,000

Tax is charged on the marginal gain;

= 80,000 * 21%

= $16,800