A corporation has decided to replace an existing machine with a newer model.The old machine had an initial purchase price of $35,000,and has $20,000 in accumulated depreciation.If the 40% tax rate applies to the corporation and the old asset can be sold for $10,000,what will be the tax effect of the replacement?

Question

Quizplus · Accepted Answer

Tax on Sale = T × (S - B)
Book Value = Initial Cost - Accumulated depreciation
Book Value = 35,000 - 20,000 = 15,000
Tax on Sale = 0.4 × (10,000 - 15,000)
Tax on Sale = -2,000
A negative tax is a refund.

A Corporation Has Decided to Replace an Existing Machine with a Newer