Question

Reversing Rapids Co. purchases an asset for $110,738. This asset qualifies as a five-year recovery asset under MACRS. The five-year expense percentages for years 1, 2, 3, and 4 are 20.00%, 32.00%, 19.20%, and 11.52% respectively. Reversing Rapids has a tax rate of 30%. The asset is sold at the end of four years for $12,656. Calculate tax credit on disposal.

Round the answer to two decimals.

Answer 1

Tax credit on sale	=	(Book value at the end of 4 years - sale price)*Tax rate
	=	(19135.53-12656)*30%
	=	$ 1,943.86
Working:
Depreciation Schedule under MACRS method:
Year	Cost	Depreciation rate	Depreciation expense	Accumulated Depreciation expense	Book Value at the end of year
1	$       1,10,738	20.00%	$     22,147.60	$     22,147.60	$     88,590.40
2	$       1,10,738	32.00%	$     35,436.16	$     57,583.76	$     53,154.24
3	$       1,10,738	19.20%	$     21,261.70	$     78,845.46	$     31,892.54
4	$       1,10,738	11.52%	$     12,757.02	$     91,602.47	$     19,135.53