Question

Active Alarm is replacing its old device manufacturing machine with a new one. The old machine is being sold for $200,000 and it has a book value of $50,000. The tax rate for Active Alarm is 40%. How much cash will Active Alarm net from the sale of the old machine? Round to the nearest penny. Do not include a dollar sign in your answer.

Answer 1

Answer: $140,000

Step-by-step explanation:

The net cash that Active Alarm will receive is the Selling price minus the tax expense on the machine.

Note that taxes are on the Gains on disposal which are calculated independent of depreciation because depreciation is not Taxable.

Calculating then we have,

Gains on disposal = Selling price - Net book value

= 200,000 - 50,000

= $150,000

Tax on Gains on disposal

= 150,000 * 40%

= $60,000

Net Realized Cash = 200,000 - 60,000

= $140,000

If you need any clarification do comment.