James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate.
The loss on disposal would be:

Question

Quizplus · Accepted Answer

The loss on disposal is calculated as the difference between the asset's book value (cost - accumulated depreciation) and the selling price. 
Book value = $5,000 - $2,000 = $3,000 
Loss on disposal = $3,000 - $2,500 = $500 
Since the firm is subject to a 30% income tax rate, the tax savings due to the loss would be: 
Tax savings = 30% * $500 = $150 
Therefore, the net cost of the loss on disposal would be: 
Net cost = $500 - $150 = $350

James Company Has an Asset That Cost $5,000 and Currently