ICMA 10.P2.289 02 300

  • This topic has 1 reply, 2 voices, and was last updated 6 months ago by Lynn Roden.
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  • #226869
    Bishir Alia
    Participant

    Hello,

    I am really confused on why the tax shield was included in the calculation since the assets will be sold. is the sell process just an assumption?

    • This topic was modified 6 months ago by Bishir Alia.
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  • #226886
    Lynn Roden
    HOCK international

    Hello Bishir Alia,

    When an asset that is being depreciated is sold, it is depreciated up to the date of the sale, and the book value on the date of the sale (after the final depreciation is recorded) is used to calculate the capital gain or loss on the sale.

    In this question, the land and building will be sold and the equipment will be removed at the end of the fifth year. So the fifth year of depreciation on the building and the fifth year of depreciation on the equipment will be taken before the land and building are sold and the equipment is removed. Since the fifth year’s depreciation is taken, the fifth year’s depreciation tax shield will be realized.

    Lynn

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