Question

Colby is in the furniture moving business. He has some equipment that he purchased new three...

Colby is in the furniture moving business. He has some equipment that he purchased new three years ago for $25,000. At the time, his accountant told him to depreciate it straight line for five years. Now there is a better machine out and Colby would like to dispose of his old machine, but he can get only $7,000 for it. Colby is in the 21% tax bracket.
What is the book value of the old machine? ___________
What is the market value of the old machine? ___________
Will there be a gain or a loss? ___________
How much will the tax effect be (deduction or additional tax owed)? __________
What is the after tax salvage value of the old machine? ________

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Answer #1

1. Straight Line Depreciation = Initial value of Machine / Life of Machine

= 25000 / 5

= 5000 per year

After 3 Years , Book Value = Initial Value - (Years * Annual Depreciation)

= 25000 - (3*5000)

= $10,000

2. Market Value = $7000

3. Since the market value is less than the book value, there will be loss.

4. Tax Effect = (Market Value - Book Value ) * Tax rate

= (7000 - 10000) * 21%

Tax Inflow = -630

5. Salvage Value

After Tax salvage value = Salvage Value - Tax Inflow

= 7000 - (-630)

= 7630

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