Question

Steelcase Inc. has a robotic welder that cost $89,500. Shipping and site preparation cost $2000 and installation cost $700. At the end of the 4 th year of service, this robotic welder was traded in for a new robotic welder with a purchase price of $95,900, shipping and site preparation cost $2,300 and installation cost $800. The trade- in allowance for the old robotic welder was $32,000 for purchasing the new robotic welder.This equipment is a 7-year MACRS class.

a)What is the cost basis of the new robotic welder for computing the amount of depreciation for income tax purposes?

b)If instead of trading in the old robotic welder, Steelcase Inc. sold the old robotic welder on the open market for $32,000, then:

i) What is the cost basis of the newrobotic welder?

ii) For the sold old robotic welder, will Steelcase Inc. need to pay a gains tax or get a tax benefit and calculate the value (assume 21% tax rate).

Answer 1

	a	Total Cost of New Robotic Welder
		Purchase price	$95,900
		Shipping and site preparation	$2,300
		Installation Cost	$800
		Total Cost of New Robotic Welder	$99,000
		7 year MACRS Depreciation:
			A	B=A*89500	C	D=89500-C
		Year	Recovery rate	AnnualDepreciation	Accumulated Depreciation	Book Value at end of year
		1	14.29%	$12,790	$12,790	$76,710
		2	24.49%	$21,919	$34,708	$54,792
		3	17.49%	$15,654	$50,362	$39,138
		4	12.49%	$11,179	$61,540	$27,960
		Selling Price of old robotic welder	$32,000
		Book Value at end of 4 years	$27,960
		Amount of gain on salvage	$4,040	(32000-27960)
		Gains on exchange is not recognized
		The cost of the new asset is offset with the gain
		Total Cost of New Robotic Welder	$99,000
		Less:Unrecognized gain	$4,040
		Cost basis of the new robotic welder	$94,960
Cost Basis =		Cash Expense+Book Value of old asset	$94,960
		Cash expense =99000-32000	$67,000
		Book Value of old asset	$27,960
	b
	i	If old welder is sold in open market
		Cost basis of the new robotic welder	$99,000
	ii	Gains tax payable =21%*4040=	$848.44