A company, with a tax rate of 40%, sold a capital asset with a net book value of $500,000 for 570,000 during the year. Which of the following amounts (in ) will most likely be reported on its income statement for the year related to the asset sale? A. 42,000 B. 70,000 C. 570,000 I picked A, answer is B. Why not calculate after tax figure? Thanks.
I think if you report $42,000, you will subject yourself to double taxation.
You dont deduct tax from the gain in this case because gains or losses on the disposal of fixed assets are reported before tax. It is a non cash transaction that increase/(decreases) taxable income. Thats why you have to adjust this in the Cashflow statement as well, deduct the gains from CFO to compensate for the overstatement of net income in this case.
Thanks.
It’s _ not _ a noncash transaction; they received $570,000 in cash when they sold the stuff.
this is considered a Non-Recurring Item ( an Infrequent OR unusual transaction). Gains or losses are part of the income from continuing operations and are reported before tax.
I ment to say that the gain/(losses) are treated like a non-cash transactions in the cash flow statement. I should have checked what I have written before posting. Thanks for correcting me s2000magician. Correct me if I am wrong 
_ It is _ treated as a cash flow in the cash flow statement: a cash flow from investing (_ CFI _), not from operations (CFO).
Aha now I get it, so we adjust the gain/(losses) in the CFO (net profit) since it is reflected in cash flow from investments. I came across this question and googled the solution, the document I found mentioned to treat it as a non cash transaction. Lesson learned, never trust unknown sources and sorry for being passing the wrong information. P.S I am a huge fan of your website and would like to sincerely thank you for your help.
My pleasure.
Thank you for your kind words.