Question

The Reburn Corporation purchased an asset several years ago for a total installed cost of $185,000. During the time since then, for corporate income tax purposes the firm has claimed $100,000 of depreciation expense on that asset. The corporate income tax rate is a flat rate of 21%.

11.     If the sales price is $95,000, the after-tax proceeds of the sale will be:

            A.        $ 97,100

            B.        $ 96,050

            C.        $ 93,950

            D.        $ 92,900

12.     If the sales price is $70,000, the after-tax proceeds of the sale will be:

            A.        $ 76,300

            B.        $ 73,150

            C.        $ 66,850

            D.        $ 63,700

Answer 1

11. The after tax sale proceeds is computed as shown below:

= Sales price - Tax Expense

Book value is computed as follows:

= Purchase cost - Depreciation

= $ 185,000 - $ 100,000

= $ 85,000

Profit on sale is computed as follows:

= Sales value - Book value

= $ 95,000 - $ 85,000

= $ 10,000

So, the after tax value will be as follows:

= Sales value - Profit x tax rate

= $ 95,000 - $ 10,000 x 21%

= $ 92,900

So, the correct answer is option D.

12. The after tax sale proceeds is computed as shown below:

= Sales price - Tax Expense

Book value is computed as follows:

= Purchase cost - Depreciation

= $ 185,000 - $ 100,000

= $ 85,000

Profit on sale is computed as follows:

= Sales value - Book value

= $ 70,000 - $ 85,000

= - $ 15,000

So, the after tax value will be as follows:

= Sales value - Profit x tax rate

= $ 70,000 - ( - $ 15,000 x 21%)

= $ 70,000 + $ 3,150

= $ 73,150

So, the correct answer is option B.

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