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  3. suppose that gardner manufacturing has assets that

Suppose that Gardner Manufacturing has assets that are worth $50 million. If these assets are...

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Accounting

Suppose that Gardner Manufacturing has assets that are worth $50 million. If these assets are destroyed, Gardner plans to replace them at a cost of $50 million. Gardner uses the straight-line depreciation method and the nature of the assets requires that they be depreciated over a two-year period. For tax purposes, the assets already have been depreciated to zero. Assume that the probability that the assets will be destroyed during the coming year equals 0.05, the income tax rate

Gardner plans to use internal funds to finance replacement of the property if it is destroyed.
Gardner purchases replacement cost insurance for a premium of $2.5 million and plans to recognize a capital gain if the insurance proceeds are used to replace the property.
Gardner purchases replacement cost insurance for a premium of $2.5 million and plans to defer the capital gain if the insurance proceeds are used to replace the property.

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