Question

Tinney​ & Smyth Inc. is considering the purchase of a new batch​ polymer-bonding machine for producing Crazy​ Rubber, a​ children's toy that is​ soft, pliable but also bouncy. The machine will increase EBITDA by $285,000 per year for the next two years. Assume that operating cash flows occur at the end of each year. The​ machine's purchase price is $320,000 and the salvage value at the end of two years is $67,200. The machine is classified as 3​-year property. To run the Crazy Rubber production line the company will need to purchase an inventory of polydimethylsiloxane and boric acid for a total cost of $12,000.The MACRS depreciation rates for the first two years are 33.33% and 44.45%. The accumulated depreciation at the end of the two years is $248,896.The tax rate is 35%.

What is the tax on the sale of the machine when it is sold at the end of year​ 2?

The book value of the machine is ​$_. ​(Round to the nearest​ dollar.)

Answer 1

With the given information, we can calculate the desired result as follows

Purchase Price of Machinery = $ 320,000

Life of machine = 3 years

MACRS depreciation rates for 1st and 2nd year = 33.33% and 44.45%

Accumulated depreciation after 2 years = $ 248,896

Purchase Price of Machinery	$ 320,000
Accumulated Depreciation after 2 years 320,000 * (33.33% + 44.45%)	$ 248,896
Book value of Machine    (Purchase Price - Accumulated Dep.)	$ 71,104

So the book value of machine is $ 71,104 after 2 years

Sale Value of Machine after 2 years = $ 67,200

Loss on Sale = Sale Value - Book Value

= 67,200 - 71,104 = $ -3,904

Therefore the loss by selling this machine is $ -3,904

So, Tax on the sale of the machinery if it is sold at the end of 2nd year will be

= Loss on sale * Tax rate

= -3,904 * 35%

= $ -1366.40

So, the company will be entitled to tax credits of $ 1366.40 because there was loss on sale of machine.

Hope I was able to solve your concern. If you are satisfied hit a thumbs up !!