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# 1 hudson industries a small electronics company 2

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Unformatted text preview: by using the following equation: Book value Installed cost of asset Accumulated depreciation (8.1) Hudson Industries, a small electronics company, 2 years ago acquired a machine tool with an installed cost of \$100,000. The asset was being depreciated under MACRS using a 5-year recovery period.4 Table 3.2 (page 100) shows that under MACRS for a 5-year recovery period, 20% and 32% of the installed cost would be depreciated in years 1 and 2, respectively. In other words, 52% (20% 32%) of the \$100,000 cost, or \$52,000 (0.52 \$100,000), would represent the accumulated depreciation at the end of year 2. Substituting into Equation 8.1, we get Book value \$100,000 \$52,000 \$48,000 The book value of Hudson’s asset at the end of year 2 is therefore \$48,000. Basic Tax Rules Four potential tax situations can occur when an asset is sold. These situations depend on the relationship between the asset’s sale price, its initial purchase price, and its book value. The three key forms of taxable income and their associated tax treatments are defined and summar...
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