Question

Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?

a) The book value of the asset is always higher than the sales price, resulting in a tax loss.

b) The sales price is typically higher than the book value, leading to a taxable gain.

c) Book value and sales price are unrelated in determining taxable income.

d) Taxes are not affected by the sale of a fixed asset.

Answer 1

The sales price is typically higher than the book value, leading to a taxable gain.

Step-by-step explanation:

The correct statement regarding the relationship between book value, sales price, and taxes when a firm sells a fixed asset is:

• b) The sales price is typically higher than the book value, leading to a taxable gain.

When a fixed asset is sold, the sales price is generally higher than the book value. The book value represents the original cost of the asset minus accumulated depreciation, while the sales price is the actual selling price of the asset. The difference between the sales price and the book value is called a taxable gain, which is subject to taxes.