Consider an asset that costs $712,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $184,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

Consider an asset that costs $712,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $184,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

Aftertax salvage value

$

Explanation:

The asset has an eight-year useful life and we want to find the BV of the asset after five years. With straight-line depreciation, the depreciation each year will be:

Annual depreciation = $712,000/8

Annual depreciation = $89,000

So, after five years, the accumulated depreciation will be:

Accumulated depreciation = 5($89,000)

Accumulated depreciation = $445,000

The book value at the end of Year 5 is thus:

BV5 = $712,000 − 445,000

BV5 = $267,000

The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured.

Aftertax salvage value = $184,000 + ($267,000 − 184,000)(0.35)

Aftertax salvage value = $213,050

To find the taxes on salvage value, remember to use the equation:

Taxes on salvage value = (BV − MV)T

This equation will always give the correct sign for a tax inflow (refund) or outflow (payment).

Listed below are a few events and transactions of Kodax Company. 2013 Jan. 2 Purchased 23,000 shares of Grecco Co. common stock for $410,000 cash plus a broker’s fee of $3,200 cash. Grecco Co. has 92,000 shares of common stock outstanding and its policies will be significantly influenced by Kodax. Sept. 1 Grecco declared and paid a cash dividend of $1.70 per share. Dec. 31 Grecco announced that net income for the year is $489,900. 2014 June 1 Grecco declared and paid a cash dividend of $2.30 per share. Dec. 31 Grecco announced that net income for the year is $705,400. Dec. 31 Kodax sold 9,000 shares of Grecco for $330,000 cash. Prepare journal entries to record the above transactions and events of Kodax Company. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

Listed below are a few events and transactions of Kodax Company.
  

2013
Jan.	2		Purchased 23,000 shares of Grecco Co. common stock for $410,000 cash plus a broker’s fee of $3,200 cash. Grecco Co. has 92,000 shares of common stock outstanding and its policies will be significantly influenced by Kodax.
Sept.	1		Grecco declared and paid a cash dividend of $1.70 per share.
Dec.	31		Grecco announced that net income for the year is $489,900.

  

2014
June	1		Grecco declared and paid a cash dividend of $2.30 per share.
Dec.	31		Grecco announced that net income for the year is $705,400.
Dec.	31		Kodax sold 9,000 shares of Grecco for $330,000 cash.

  

Prepare journal entries to record the above transactions and events of Kodax Company. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

 

Explanation:

Jan. 2, 2013	Record purchase of investment ($410,000 + $3,200) = $413,200.
	Long-Term Investments—Grecco:
	Kodax’s investment equals 25% of Grecco’s stock (23,000/92,000).
	Kodax should use the equity method to account for its investment.

    

Sept. 1, 2013

Record receipt of cash dividend (23,000 × $1.70) = $39,100.

    

Dec. 31, 2013

Record equity in investee earnings ($489,900 × (23,000/92,000)) = $122,475.

    

June 1, 2014

Record receipt of cash dividend (23,000 × $2.30) = $52,900.

    

Dec. 31, 2014

Record equity in investee earnings ($705,400 × (23,000/92,000)) = $176,350

    

Dec. 31, 2014

Record sale of investment.

    

Book value (Grecco Co. stock) at 12/31/2014:
Original cost	$	413,200
Less 2013 dividends		(39,100	)
Plus share of 2013 earnings		122,475
Less 2014 dividends		(52,900	)
Plus share of 2014 earnings		176,350
Book value at date of sale	$	620,025
Book value of shares sold ($620,025 × [9,000/23,000])	$	242,618	†

     ^†Rounded to nearest dollar.