Question

Distinguish the differences between stock splits and stock dividends in paragraph with examples.

Answer 1

Four ways and the tax impact on the after-tax net proceeds received from the sale of an asset

1. When the sales value of the asset is equal to its tax book value, there will be no tax consequences for the net proceeds since there is no gain or loss from the asset. For example, the original cost of the asset 10000, tax book value 8000, sales value 8000. No tax liability
2. If the sale is for an amount which is less than the tax book value, there is said to be loss. This loss can be used to reduce the total tax liability by treating it as an operating loss. For example, the original cost of the asset 10000, tax book value 8000, sales value 7000. Loss amount 1000
3. The third way for tax consequence is when the sale is for an amount which is more than the tax book value but less than original cost. In this situation, the amount equal to the book value is not taxed. But the amount in excess of book value will be taxed by considering it as an operating profit. For example, the original cost of the asset 10000, tax book value 8000, sales value 9000. Tax liability is for 1000
4. The tax liability differs when the sale is for an amount which is more than its original cost. The difference between the book value and original cost will be treated as operating income. The amount in excess of the original cost will be treated as capital gain. Both operating income and capital gain will be taxed in different rates. For example, the original cost of the asset 10000, tax book value 8000, sales value 13000. Operating income 2000. Capital gain 3000.