An asset with a book value of $200,000 is sold for $160,000.The applicable tax rate is 40%.What is the tax effect of the loss?

Name: An asset with a book value of $200,000 is sold for $160,000.The applicable tax rate is 40%.What is the tax effect of the loss?
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Quizplus · Accepted Answer

The asset is sold at a loss of $40,000 ($200,000 - $160,000). The tax effect of the loss is a tax shield, which is the loss multiplied by the tax rate: $40,000 * 40% = $16,000. This results in a $16,000 cash inflow.

An Asset with a Book Value of $200,000 Is Sold