Three years ago,Knox Glass purchased a machine for a 3-year project.The machine is being depreciated straight-line to zero over a 5-year period.Today,the project ended and the machine was sold.Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)
A)Sale price + (Sales price - Book value) × T
B)Sale price + (Sales price - Book value) × (1 - T)
C)Sale price + (Book value - Sale price) × T
D)Sale price + (Book value - Sale price) × (1 - T)
E)Sale price × (1 - T)

Question

Quizplus · Accepted Answer

Sale price + (Book value - Sale price) × TThe aftertax salvage value is calculated by taking the sale price and adding the tax effect of the sale. If the sale price is less than the book value, the company can deduct the loss on the sale from its taxable income, effectively receiving a tax benefit equal to the loss multiplied by the tax rate (T). Hence, the formula is Sale price + (Book value - Sale price) × T.

Three Years Ago,Knox Glass Purchased a Machine for a 3-Year