A plant asset with a book value of $200,000 is sold for $150,000.The applicable tax rate is 40%.What is the tax effect of the loss on sale?

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Quizplus · Accepted Answer

The loss on sale is $50,000 ($200,000 book value - $150,000 sale price). The tax effect of the loss is a reduction in taxes payable, calculated as the loss multiplied by the tax rate: $50,000 * 40% = $20,000. This results in a $20,000 cash inflow because it reduces the amount of cash that has to be paid out for taxes.

A Plant Asset with a Book Value of $200,000 Is