Description
Genetic Insights Co. purchases an asset for $17,324. This asset qualifies as a seven-year recovery asset under MACRS. The seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. Genetic Insights has a tax rate of 30%. The asset is sold at the end of six years for $3,996.
Calculate gain or loss on disposal.
Correct answer is 1,678.05, please explain.
Explanation & Answer
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Cost of the asset = $17,324
Depreciation for 1st year = Cost of the asset X (Rate/100)
= 17,324 X (14.29/100)
= 2,475.60
Depreciation for 2nd year = Cost of the asset X (Rate/100)
= 17,324 X (24.49/100)
= 4,242.65
Depreciation for 3rd year = Cost of the asset X (Rate/100)
= 17,324 X (17.49/100)
= 3,029.97
Depreciation for 4th year = Cost of the asset X (Rate/100)
= 17,324 X (12.49/100)
= 2,163.76
Depreciation for 5th year = Cost of the asset X (Rate/100)
= 17,324 X (8.93/100)
= 1,547.03
Depreciation for 6th year = Cost of the asset X (Rate/100)
= 17,324 X (8.93/100)
= 1,547.03
Therefore total depreciation for all 6 years = 2,475.60 + 4,242.65 +3,029.97 +2,163. 76 +1,547.03 +1,547.03
= 15,006.04
Book value of the asset at the end of 6th year = Cost of the asset - Total depreciation
= 17,324 - 15,006.04
= 2,317.96
Profit or loss on sale of the asset = Book value - Sales value
= 2,317.96 - 3,996
Profit = $1,678.04 (being sales is more than the book value)
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