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A semiconductor assembling machine is purchased for $100,000. The asset class is 36.0. The revenue after expenses is $40,000. The tax rate is 40%. Calculate the the ATCF in year 4 by using the a. SL method b. GDS method How much is the gain(loss) if the machine is sold after year 3(4) for $27,000.
Expert Answer
| As per IRS 2016 Publication 946 | |||||||
| Assets Class | Recovery Periods(in years) | ||||||
| Class Life (in years) |
GDS(MACRS) | ADS | |||||
| 36.0 | 6 | 5 | 6 | ||||
| a. Sl Method (ADS Method) | |||||||
| If Sold After 3 years | |||||||
| Year | Capital Inflow/(Outflow) | Revenue | Depn | Profit | Tax | ATCF | |
| A | B | C | D=B-C | E=D*.4 | F=A+B-E | ||
| – | (1,00,000) | (1,00,000) | |||||
| 1 | 40,000 | 16,667 | 23,333 | 9,333 | 30,667 | ||
| 2 | 40,000 | 16,667 | 23,333 | 9,333 | 30,667 | ||
| 3 | 36,200 | 40,000 | 16,667 | 23,333 | 9,333 | 66,867 | |
| Total | 28,200 | ||||||
| Calculation of Depreciation =100000/6 | |||||||
| Total Cost | 1,00,000 | ||||||
| Less; Depn for three years | 50,000 | ||||||
| Balance at the end of three years | 50,000 | ||||||
| Less: Sales Value | 27,000 | ||||||
| Loss on sale | 23,000 | ||||||
| Tax saving due to loss 23000*.4 | 9,200 | ||||||
| Total Inflow (27000+9200) | 36,200 | ||||||
| If Sold After 4 years | |||||||
| Year | Capital Inflow/(Outflow) | Revenue | Depn | Profit | Tax | ATCF | |
| A | B | C | D=B-C | E=D*.4 | F=A+B-E | ||
| – | (1,00,000) | (1,00,000) | |||||
| 1 | 40,000 | 16,667 | 23,333 | 9,333 | 30,667 | ||
| 2 | 40,000 | 16,667 | 23,333 | 9,333 | 30,667 | ||
| 3 | 40,000 | 16,667 | 23,333 | 9,333 | 30,667 | ||
| 4 | 29,533 | 40,000 | 16,667 | 23,333 | 9,333 | 60,200 | |
| Total | 52,200 | ||||||
| Calculation of Depreciation =100000/6 | |||||||
| Total Cost | 1,00,000 | ||||||
| Less; Depn for four years | 66,667 | ||||||
| Balance at the end of three years | 33,333 | ||||||
| Less: Sales Value | 27,000 | ||||||
| Loss on sale | 6,333 | ||||||
| Tax saving due to loss 6333*.4 | 2,533 | ||||||
| Total Inflow (27000+9200) | 29,533 | ||||||
| b. GDS Method | |||||||
| General Depreciation System (GDS): Declining balance method involved applying depreciation rate to the non-depreciated balance. | |||||||
| If Sold After 3 years | |||||||
| Year | Capital Inflow/(Outflow) | Revenue | Depn rate | Depn | Profit | Tax | ATCF |
| A | B | C | C1 | D=B-C1 | E=D*.4 | F=A+B-E | |
| – | (1,00,000) | (1,00,000) | |||||
| 1 | 40,000 | 20.00% | 20,000 | 20,000 | 8,000 | 32,000 | |
| 2 | 40,000 | 32.00% | 32,000 | 8,000 | 3,200 | 36,800 | |
| 3 | 27,720 | 40,000 | 19.20% | 19,200 | 20,800 | 8,320 | 59,400 |
| Total | 28,200 | ||||||
| Calculation of Depreciation =100000/6 | |||||||
| Total Cost | 1,00,000 | ||||||
| Less; Depn for three years | 71,200 | ||||||
| Balance at the end of three years | 28,800 | ||||||
| Less: Sales Value | 27,000 | ||||||
| Loss on sale | 1,800 | ||||||
| Tax saving due to loss1800*.4 | 720 | ||||||
| Total Inflow (27000+9200) | 27,720 | ||||||
| If Sold After 4 years | |||||||
| Year | Capital Inflow/(Outflow) | Revenue | Depn rate | Depn | Profit | Tax | ATCF |
| A | B | C | C1 | D=B-C1 | E=D*.4 | F=A+B-E | |
| – | (1,00,000) | (1,00,000) | |||||
| 1 | 40,000 | 20.00% | 20,000 | 20,000 | 8,000 | 32,000 | |
| 2 | 40,000 | 32.00% | 32,000 | 8,000 | 3,200 | 36,800 | |
| 3 | 40,000 | 19.20% | 19,200 | 20,800 | 8,320 | 31,680 | |
| 4 | 23,112 | 40,000 | 11.52% | 11,520 | 28,480 | 11,392 | 51,720 |
| Total | 52,200 | ||||||
| Calculation of Depreciation =100000/6 | |||||||
| Total Cost | 1,00,000 | ||||||
| Less; Depn for four years | 82,720 | ||||||
| Balance at the end of three years | 17,280 | ||||||
| Less: Sales Value | 27,000 | ||||||
| Loss on sale | (9,720) | ||||||
| Tax payment due to profit -9720*.4 | (3,888) | ||||||
| Total Inflow (27000+9200) | 23,112 | ||||||
| MACRS applicable percentage for property class | |||||||
| Recovery Year | 5-Year | ||||||
| 1 | 20.00% | ||||||
| 2 | 32.00% | ||||||
| 3 | 19.20% | ||||||
| 4 | 11.52% | ||||||
| 5 | 11.52% | ||||||
| 6 | 5.76% | ||||||
