How is the tax impact calculated on the sold equipment in Heritage Corporation's scenario?

To understand how the tax impact is calculated on the sale of equipment, it's essential to look at the relationship between the sale price, book value, and the potential gain or loss on the sale of an asset.

In Heritage Corporation's scenario, the correct method to determine the tax impact involves first calculating the net profit or loss from the sale of equipment, which is derived from taking the sale price and subtracting the book value of the equipment. This net profit or loss indicates whether the company experience a gain (if sale price exceeds book value) or a loss (if book value exceeds sale price). The tax impact is then computed by applying the tax rate to this net profit.

Therefore, using net profit represents the right approach because taxes are calculated based on the taxable gain. If the equipment is sold for more than its book value, the gain becomes taxable, and if it is sold for less, it may generate a tax benefit through a loss that might offset other taxable income. This reasoning validates why the formula involves net profit and the tax rate directly.

In contrast, other choices imply calculating tax impacts incorrectly. For example, simply using the sale price multiplied by the tax rate does not consider the book value, while using the book value subtracted from