Bill Sharpe, owner of Sharper Knives Inc., is closing his business at the end of the current fiscal year. His sole asset, the knife-sharpening machine, is three years old. A depreciation table for the asset is shown below. Bill has agreed to sell the machine at the end of the year for $100,000. What is the impact on taxes from the sale of the machine? (Assume that Sharper Knives claimed a regular depreciation expense in the calculation of income taxes.)The tax rate is 35%. Round your answers to the nearest dollar. Depreciation Table for Knife Sharpener
$$\begin{array} { | c | c | c | c | c | }
\hline \text { Year } & \text { Basis } & \text { Rate } & \begin{array} { c }
\text { Depreciation } \
\text { Expense }
\end{array} & \begin{array} { c }
\text { Accumulated } \
\text { Depreciation }
\end{array} \
\hline 1 & \$ 250,000 & 14,29 \% & \$ 35,725 & \$ 35,725 \
\hline 2 & \$ 250,000 & 24,49 \% & \$ 61,225 & \$ 96,950 \
\hline 3 & \$ 250,000 & 17.49 \% & \$ 43,725 & \$ 140,675 \
\hline 4 & \$ 250,000 & 12,49 \% & \$ 31,225 & \$ 171,900 \
\hline 5 & \$ 250,000 & 8.93 \% & \$ 22,325 & \$ 194,225 \
\hline
\end{array}$$

Question

Bill Sharpe, owner of Sharper Knives Inc., is closing his business at the end of the current fiscal year. His sole asset, the knife-sharpening machine, is three years old. A depreciation table for the asset is shown below. Bill has agreed to sell the machine at the end of the year for $100,000. What is the impact on taxes from the sale of the machine? (Assume that Sharper Knives claimed a regular depreciation expense in the calculation of income taxes.)The tax rate is 35%. Round your answers to the nearest dollar. Depreciation Table for Knife Sharpener
$$\begin{array} { | c | c | c | c | c | } 
\hline \text { Year } & \text { Basis } & \text { Rate } & \begin{array} { c } 
\text { Depreciation } \
\text { Expense }
\end{array} & \begin{array} { c } 
\text { Accumulated } \
\text { Depreciation }
\end{array} \
\hline 1 & \$ 250,000 & 14,29 \% & \$ 35,725 & \$ 35,725 \
\hline 2 & \$ 250,000 & 24,49 \% & \$ 61,225 & \$ 96,950 \
\hline 3 & \$ 250,000 & 17.49 \% & \$ 43,725 & \$ 140,675 \
\hline 4 & \$ 250,000 & 12,49 \% & \$ 31,225 & \$ 171,900 \
\hline 5 & \$ 250,000 & 8.93 \% & \$ 22,325 & \$ 194,225 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The gain on the sale of the machine is $100,000 - $140,675 = $38,264. The tax on this gain is $38,264 x 35% = $13,392. However, Sharper Knives has already claimed depreciation expenses of $140,675 on the machine. This means that the tax basis of the machine is $250,000 - $140,675 = $109,325. Therefore, the taxable gain on the sale of the machine is $100,000 - $109,325 = $3,264. The tax on this gain is $3,264 x 35% = $1,142. Therefore, Sharper Knives will receive a tax refund of $13,392 - $1,142 = $3,264.

Bill Sharpe, Owner of Sharper Knives Inc A)$3,264 Tax Refund from IRS B)$3,264 Additional Taxes Owing to Business

Bill Sharpe, Owner of Sharper Knives Inc A)$3,264 Tax Refund from IRS
B)$3,264 Additional Taxes Owing to Business