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Author Question: A machine was purchased two years ago for 120,000 and can be sold for 50,000 today. The machine has ... (Read 56 times)

jeatrice

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on: Jul 11, 2018
A machine was purchased two years ago for 120,000 and can be sold for 50,000 today. The machine has been depreciated using the MACRS 5-year recovery period and the firm pays 40 percent taxes on both ordinary income and capital gains.
 
  (a) Compute recaptured depreciation and capital gain (loss), if any.
  (b) Find the firm's tax liability.

Question 2

A firm has an issue of 1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date.
 
  If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.
  A) 1,000
  B) 805.20
  C) 1,115.50
  D) 1,268.40


yasmin

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Reply #1 on: Jul 11, 2018
Answer to Question 1

(a) Book Value = 120,000 (1 - 0.20 - 0.32 ) = 57,600
Recaptured depreciation = 0
Capital loss = 57,600 - 50,000 = 7,600
(b) Tax benefit = 7,600  0.40 = 3,040

Answer to Question 2

D


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