Question

(Capital Gains Tax) The R. T. Kleinman Corporation is considering selling one of its
old assembly machines. The machine, purchased for $40,000 five years ago, had an
expected life of 10 years and an expected salvage value of zero. Assume Kleinman
uses simple straight-line depreciation, creating depreciation of $4,000 per year, and
could sell this old machine for $45,000. Also assume a 34% marginal tax rate.
a. What would be the taxes associated with this sale?
b. If the old machine were sold for $40,000, what would be the taxes associated
with this sale?
c. If the old machine were sold for $20,000, what would be the taxes associated
with this sale?
d. If the old machine were sold for $17,000, what would be the taxes associated
with this sale?

Answer 1

Cost of machine= $40000

Depreciation for 5 Years already charged = 4000*5 = $20000

WDV of Machine at the end of 5Th Year = $40000-$20000= $20000

a) Sale price= $45000

Profit= $45000-$20000= $25000

Tax on profit @34% on $25000= $8500/-

Net profit = $25000-$8500= $16500/-

b) Sale Price= $40000

Profit = $40000-$20000= $20000

Tax on Profit @34%= $6800/-

Net profit=$13200

c) Sale price=$20000

Profit= $20000-$20000=0

Tax on profit @34% = 0

d) Sale price = $17000

Loss on sale = $17000-$20000= $3000

tax saving on loss @ 34%= $1020/-