Southwest Co. purchases an asset for $60,000. This asset qualifies as a seven-year recovery asset under MACRS. Winston has a tax rate of 30%
The seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end of six years for $10,000, what is the cash flow from disposal?
What will be an ideal response?
Answer: The six-year sale is at $10,000. To begin with, the book value of the asset must be established to determine if a gain or loss has been incurred at disposal. The depreciation schedule for the $60,000 asset is:
Year 1: $60,000 × 0.1429 = $8,574
Year 2: $60,000 × 0.2449 = $14,694
Year 3: $60,000 × 0.1749 = $10,494
Year 4: $60,000 × 0.1249 = $7,494
Year 5: $60,000 × 0.0893 = $5,358
Year 6: $60,000 × 0.0893 = $5,358
Accumulated Depreciation = $8,574 + $14,694 + $10,494 + $7,494 + $5,358 + $5,358 = $51,972
Book value of asset = $60,000 - $51,972 = $8,028
Gain on disposal is $10,000 - $8,028 = $1,972
Tax gain = Gain on disposal × tax rate = $1,972 × 0.3 = $591.60
After-tax cash flow at disposal = $10,000 - $591.60 = $9,408.40
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