A property is sold for $5,100,000 with selling costs of 3% of the sales price.The mortgage balance at the time of sale is $3,600,000.The property was purchased 5 years ago for $4,820,000.Annual depreciation allowances of $153,016 have been taken.If the tax rate is 28%,what is the after-tax cash flow from sale of the property?

Question

Quizplus · Accepted Answer

1. Calculate the selling costs: 
$5,100,000 x 3% = $153,000

2. Calculate the gain/loss from the sale: 
Selling price - Selling costs - Mortgage balance - Book value (original cost - accumulated depreciation)

$5,100,000 - $153,000 - $3,600,000 - ($4,820,000 - $153,016 x 5) = $1,334,984

3. Calculate the tax liability: 
$1,334,984 x 28% = $373,496.32

4. Calculate the after-tax cash flow: 
$1,334,984 - $373,496.32 = $961,487.68

5. Add back the amount of depreciation taken: 
$961,487.68 + $153,016 = $1,114,503.68

Therefore, the best choice is D) $1,097,218.

A Property Is Sold for $5,100,000 with Selling Costs of 3