Suppose a firm has an asset that originally cost $5000 and currently has accumulated depreciation of $2000. The firm is subject to a 28 per cent income tax rate. Suppose the firm sells the asset for $2000. What was the book value before sale?

Question

Quizplus · Accepted Answer

The book value is equal to the original cost minus the accumulated depreciation. Therefore, the book value before the sale is:

Book value = $5000 - $2000 = $3000

However, since the firm sold the asset for $2000, there is a loss on the sale of $1000 ($3000 book value - $2000 selling price). This loss can be used to reduce the firm's taxable income, resulting in tax savings of:

Tax savings = $1000 x 0.28 = $280

Therefore, the after-tax proceeds from the sale are:

After-tax proceeds = $2000 + $280 = $2280

Suppose a Firm Has an Asset That Originally Cost $5000