Determine the amount of any DR, CG, or CL generated by each event described below. Use the result to determine the income tax effect, if Te = 30%.
(a) A strip of land zoned as “Commercial A” purchased 8 years ago for $2.6 million was just sold at a 15% profit.
(b) Earthmoving equipment purchased for $155,000 was depreciated using MACRS over a 5-year recovery period. It was sold at the end of the fifth year of ownership for $10,000.
(c) A MACRS-depreciated asset with a 7-year recovery period has been sold after 8 years at an amount equal to 20% of its first cost of $150,000.
(a) Land is not depreciable.
CG = TI = 0.15(2,600,000) = $390,000
Taxes = 390,000(0.30) = $117,000
(b) SP = $10,000
BV5 = 155,000(0.0576) = $8928
DR = SP – BV5
= 10,000 – 8928 = $1072
Taxes = DR(Te) = 1072(0.30) = $322
(c) SP = 0.2(150,000) = $30,000
BV7 = $0
DR = SP – BV7 = $30,000
Taxes = 30,000(0.3) = $9000
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