A Firm Is Selling an Existing Asset for $5,000

question 51

Multiple Choice

A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.

• A) $0 tax liability
• B) $1,320 tax liability
• C) $1,160 tax liability
• D) $2,000 tax benefit

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Definitions:

Borrowed

Refers to money obtained with an agreement to return it, usually with interest.

Lottery

A form of gambling involving the drawing of numbers at random for a prize.

Earn

Earn refers to receiving money in exchange for work or services rendered, or through investment returns.

Interest Rate

The percentage of the principal amount charged by a lender to a borrower for the use of assets, typically expressed as an annual percentage rate (APR).