A local pizza restaurant purchased a delivery truck for $35,000 with cash six and a half years ago. The vehicle has been depreciated straight line assuming a ten year life. It was sold yesterday for $16,700. If the appropriate tax rate is 35%, how much does the sale contribute to net income and cash flow?

Question

A local pizza restaurant purchased a delivery truck for $35,000 with cash six and a half years ago. The vehicle has been depreciated straight line assuming a ten year life.  It was sold yesterday for $16,700. If the appropriate tax rate is 35%, how much does the sale contribute to net income and cash flow?  ​

Quizplus · Accepted Answer

First, we need to calculate the book value of the truck after six and a half years of depreciation:

Depreciation per year = (Purchase price - Residual value) / Useful life
Depreciation per year = ($35,000 - $0) / 10 = $3,500 per year

Depreciation for 6.5 years = $3,500 * 6.5 = $22,750
Book value = Purchase price - accumulated depreciation
Book value = $35,000 - $22,750 = $12,250

Since the truck was sold for $16,700, there is a gain on the sale:

Gain on sale = Sale price - Book value = $16,700 - $12,250 = $4,450

The gain is subject to a tax of 35%:

Tax on gain = $4,450 * 0.35 = $1,557.50

To calculate the contribution to net income and cash flow, we need to use the following formula:

Net cash flow = Sale price - Tax on gain - Book value = $16,700 - $1,557.50 - $12,250 = $2,892.50

Therefore, the sale contributes $2,892.50 to net income and cash flow, which is option B.

A Local Pizza Restaurant Purchased a Delivery Truck for $35,000