4. (10 pts) A 5-year MACRS asset was bought for S100,000, and S1500 was paid for

Question

4. (10 pts) A 5-year MACRS asset was bought for S100,000, and S1500 was paid for delivery S2500 for installation labor, and S5000 for site preparation. In addition, a membership in the APO (Awesome Professional Organization) was purchased at $2500, which would mean that future upgrades to the machine would be given at a discount. a) Determine the cost basis of this asset. b) Find the amount of tax depreciation to be deducted in year 3? c) Determine the book value after year 4? d)If the asset is to be sold at the end of year 5 what is the gains tax if the sale price is $14,500 and the tax rate is 21%?

Explanation / Answer

(a) Cost Basis of an assets includes all the expenses that is necessary to make the machine put to use. So in this case Cost basis of the assets includes its freight cost, installation cost and site preparation. Purchase Cost $100,000 Freight $1,500 Installation $2,500 Site preparation $5,000 Cost Basis $109,000 (b) Since company is using Macrs 5 yrs rates A B C = A x B (D = C1+C2+…C6) E = B - D Year Rates Cost Basis Depreciation Accumulated Depreciation Book Value 1 20.00% $109,000 $21,800 $21,800 $87,200 2 32.00% $109,000 $34,880 $56,680 $52,320 3 19.20% $109,000 $20,928 $77,608 $31,392 4 11.52% $109,000 $12,557 $90,165 $18,835 5 11.52% $109,000 $12,557 $102,722 $6,278 6 5.76% $109,000 $6,278 $109,000 $0 Depreciation Expense for year 3 is $20,928 (c ) Book Value after year 4 is $18,835 ( See above table) (d) Sale value $14,500 Less: Book Value $          6,278 Gain in disposal $8,222 Tax at 21% 1726.62 (8222 x 21%) Note: I have tried my best for correct solution, still need any further help, please ask in comment. Thanks.

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