Question

In year 0, an electrical appliance company purchased an industrial robot costing $350,000. The robot is to be used for welding operations, classified as seven-year recovery property and has been depreciated by the MACRS method. If the robot is to be sold after five years, compute the amounts of gains (losses) for the following two salvage values (assume that both capital gains and ordinary incomes are taxed at 21%):

(a) $20,000

(b) $99,000

(a) If the robot is to be sold after five years and its salvage value is $20,000, the amount of gains (losses) is________ (Round to the nearest dollar.)

Gains tax (loss credit) is_________(Round to the nearest dollar.)

(b) If the robot is to be sold after five years and its salvage value is $99,000, the amount of gains (losses) is________ (Round to the nearest dollar.)

Gains tax (loss credit) is_________(Round to the nearest dollar.)

Answer #1

First we want to find the allowed depreciation cost for the robot given manufacturing cost as $350000.00 with 7 year MACRS

The below is the forrmula for allowed depreciation expenses

Allowed depreciation=BV(x)MACRSd

BV=book value of the asset

MACRS=depreciation expense of the asset

d=no.of years of depreciation

Allowed depreciation=$350000(x)[0.1429+0.244+0.1749+0.1249+0.0893/2]

=350000(x)*0.73225

=256305.00

Book value=$350000-$256305.00=$93695

a)If sold at $20000

Losses=$20000-BV

=$20000-$93695

=$73695

Next want to calculate the loss credit

Loss credit=losses*i

Where(i)=21/100=0.21

=$73695*(0.21)

=$15475.9

=$15476

Next want to calculate the net loss

Net loss=losses+loss credit

=$73695+$15476

=$89171

b)If sold at $99000

Gain=$99000-BV

=$99000-$93695

=$5305

Gain tax =gain*(i)

=$5305*(0.21)

=$1114.05

=$1114

Net gain =gain-gain tax

=$5305-$1114

=$4191

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