Calculate gain or loss on disposal.

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Business Finance

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. 

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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)

Please let me know if you need any clarification. I'm always happy to answer your questions.


Anonymous
Really great stuff, couldn't ask for more.

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