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The book value of a plant asset is:

a. the fair market value of the asset at a balance sheet date.

b. the asset's acquisition cost less the total related depreciation recorded to date.

c. equal to the balance of the related accumulated depreciation account. 

d. the assessed value of the asset for property tax purposes.

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Joshua Stredder
Joshua StredderLv10
22 Jan 2021

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An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $500,000 and will be sold for $100,000 at the end of the project. Assume tax rate is 35%. (A) Find the asset’s book value at the time of liquidation. (B) Find the amount of capital gain realized from the asset’s liquidation. (C) What is the tax implication of the asset’s liquidation? (D) What is the net salvage value of the asset? [Depreciation schedule for assets with 5-year tax life is: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76% in year 1 through year 6, respectively]

Balance Sheet

ASSETS:

Cash and Marketable Securities: $75.00

Accounts Receivable: $100.00

Inventories: $200.00

TOTAL CURRENT ASSETS: $375.00

Gross Property, Plant and Equipment: (blank)

less Accumulated Depreciation: $50.00

NET FIXED ASSETS: (blank)

TOTAL ASSETS: (blank)

LIABILITIES AND EQUITY:

Accounts Payable: $75.00

Notes Payable: (blank)

Accruals: $75.00

TOTAL CURRENT LIABILITIES: $300.00

Long Term Debt: $350.00

TOTAL LIABILITIES: $650.00

PREFERRED STOCK: (blank)

Common Stock: $50.00

Accumulated Retained Earnings: $125.00

COMMON EQUITY: $175.00

TOTAL LIABILITIES AND EQUITY: $875.00

1. Consider the balance sheet above:

A. What is the value for total assets?

B. What is the value for net fixed assets?

C. What is the value for gross, property, plant andequipment?

D. What is the value for notes payable?

E. What is the value for preferred stock?

Thank you in advance!!

1. Suppose you buy an asset for $1,000,000. If it costs $100,000 for shipping and installation, how much is your investment outlay?

2. Suppose you buy an asset for $100,000 that is depreciated for tax purposes over 20 years using straight-line depreciation. Break down

the tax effects upon sale of this asset after five years if the sales

price is: (a) $125,000 (b) $100,000 (c) $75,000 (d) $50,000

3. The Schwab Steel Company is considering two different wire sol-dering machines. Machine 1 has an initial cost of $100,000, costs $20,000 to set up and is expected to be sold for $20,000 after 10 years. Machine 2 has an initial cost of $80,000, costs $30,000 to set up and is expected to be sold for $10,000 after 10 years. Both machines would be depreciated over 10 years using straight-linedepreciation. Schwab has a tax rate of 35%.

(a)

What are the cash flows related to the acquisition of each machine?

(b)

What are the cash flows related to the disposition of each machine?

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