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Reversing Rapids Co. purchases an asset for $103,725. This asset qualifies as a five-year recovery asset...

Reversing Rapids Co. purchases an asset for $103,725. 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 year 4 for $10,599, what is the cash flow from disposal?

Calculate gain or loss on disposal. Gain should be entered as a positive number. Loss should be entered as a negative number.

Round the answer to two decimals.

Solutions

Expert Solution

Cost of Asset = $103,725
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $103,725
Depreciation Year 1 = $20,745.00

Depreciation Year 2 = 32.00% * $103,725
Depreciation Year 2 = $33,192.00

Depreciation Year 3 = 19.20% * $103,725
Depreciation Year 3 = $19,915.20

Depreciation Year 4 = 11.52% * $103,725
Depreciation Year 4 = $11,949.12

Book Value at the end of Year 4 = $103,725.00 - $20,745.00 - $33,192.00 - $19,915.20 - $11,949.12
Book Value at the end of Year 4 = $17,923.68

Loss on Disposal = Salvage Value - Book Value
Loss on Disposal = $10,599.00 - $17,923.68
Loss on Disposal = -$7,324.68

Tax paid on Loss on Disposal = Tax Rate * Loss on Disposal
Tax paid on Loss on Disposal = 30% * -$7,324.68
Tax paid on Loss on Disposal = -$2,197.40

Cash Flow from Disposal = Salvage Value - Tax paid on Loss on Disposal
Cash Flow from Disposal = $10,599.00 - (-$2,197.40)
Cash Flow from Disposal = $12,796.40

jeff jeffy answered 1 year ago
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