A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $7,560 tax liability
C) $4,400 tax liability
D) $7,720 tax liability

Question

Quizplus · Accepted Answer

The gain on the sale of the asset can be calculated as:

Sale price - (Original cost - Accumulated depreciation)
$21,000 - ($10,000 - (4/5 x $10,000)) = $13,200

The tax on the gain can be calculated as:

Tax rate x (Sale price - Original cost)
0.4 x ($21,000 - $10,000) = $4,400

However, since the asset has already been fully depreciated for tax purposes, there will be no recapture of depreciation tax liability. Therefore, the total tax liability would be:

$4,400 (capital gains tax) = $4,400

So, the correct choice is D.

A Corporation Is Selling an Existing Asset for $21,000