Question

Genetic Insights Co. purchases an asset for $10,252. 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 $3,916.

Calculate tax paid on gain on disposal. Round the answer to two decimals.

Answer 1

Total depreciation applied = sum of depreciation rates for Year 1 to 6 = 14.29% + 24.49% + 17.49% + 12.49% + 8.93% + 8.93% = 86.62%

remaining depreciation not applied = 100% - Total depreciation applied = 100% - 86.62% = 13.38%

total depreciation which can be applied on any asset is always 100%.

remaining book value of asset = cost of asset*remaining depreciation not applied = $10,252*13.38% = $1,371.7176

Tax paid on gain on disposal = (selling price of asset - remaining book value of asset)*tax rate

Tax paid on gain on disposal = ($3,916 - $1,371.7176)*30% = $2,544.2824*30% = $763.28

tax paid on gain on disposal is $763.28.