The taxable consequences of each of these sale prices

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Unformatted text preview: s initial purchase price of $100,000 and its current book value of $48,000. The taxable consequences of each of these sale prices is described below. The sale of the asset for more than its initial purchase price If Hudson sells the old asset for $110,000, it realizes a capital gain of $10,000, which is taxed as ordinary income.5 The firm also experiences ordinary income in the form of recaptured depreciation, which is the portion of the sale price that is above book value and below the initial purchase price. In this case there is recaptured depreciation of $52,000 ($100,000 $48,000). Both the $10,000 capital gain and the $52,000 recaptured depreciation are shown under the $110,000 sale price in Figure 8.5. The taxes on the total gain of $62,000 are calculated as follows: Tax Amount (1) Capital gain Recaptured depreciation Totals Rate (2) [(1) (2)] (3) $10,000 0.40 $24,000 52,000 0.40 20,800 $62,000 $24,800 These taxes should be used in calculating the initial investment in the new asset, using the format in Table 8.2. In effect, the taxes raise the amount of the firm’s initial investment in the...
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This document was uploaded on 01/19/2014.

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