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) Book value affects taxes
b) Sales price affects book value
c) Taxes affect sales price
d) Taxes affect book value

Answer 1

Book value affects taxes, Taxes affect book value

Step-by-step explanation:

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

1. Book value affects taxes: Book value is the value of an asset as recorded in the company's financial statements. When a firm sells a fixed asset, the book value of the asset affects the amount of taxable gain or loss. If the sales price is higher than the book value, the firm will have a taxable gain, and if the sales price is lower than the book value, the firm will have a taxable loss.
2. Taxes affect book value: Taxes paid on the sale of a fixed asset can affect the book value of the asset. The firm must record the taxes paid as an expense, which can decrease the book value of the asset.