If Messerschmidt's objective was that of tax minimization, at what cost would they record the warehouse on their books?

Question

Quizplus · Accepted Answer

If Messerschmidt's objective was tax minimization, they would want to record the warehouse at the lowest possible value to reduce their taxable income. Based on the information given, the warehouse has a fair market value of $1,100,000 and Messerschmidt would have to pay a 40% tax if they sold the warehouse. Therefore, if they recorded the warehouse at its fair market value, they would have to pay taxes on its full value.

The best option for tax minimization would be to record the warehouse at its net realizable value (NRV), which is the amount they could reasonably expect to sell the warehouse for, minus the cost to sell it. The information given states that the cost to sell the warehouse is $220,000, so the NRV would be $880,000 ($1,100,000 - $220,000). Therefore, the best choice is B, which is the closest option to the NRV of $880,000.

If Messerschmidt's Objective Was That of Tax Minimization, at What