1. avatar says

    Sir, Your lectures are excellent I owe you a lot ..
    But with regard to TAX SAVINGS ON DEPRECIATION Pl clarify me with foll.. IF STRAIGHT LINE METHOD is followed with SCRAP VALUE at end is a) = asset value @beginning of last yr b)> asset value c)< asset value [ treatment in the operating & terminal flow heads]
    I would appreciate if you could explain these scenarios with example…

    • Avatar of johnmoffat says

      I am not exactly sure what you mean.
      I will give an example but if you mean something different then ask again :-)

      Suppose that the cost is 100,000, it lasts 4 years, with scrap value of 10,000

      With straight line depreciation for tax purposes, it will mean dep’n of 90,000/4 = 22,500 per year. If tax is 30% then the tax saving will be 30% x 22500 = 6750 per year for 4 years.
      There would be no balancing charge or allowance at the end because the total tax depreciation will be equal to the fall in value.
      (It is unusual for the examiner to have straight line depreciation – it is almost always reducing balance. Also, if it is straight line, then there will almost certainly be no scrap value.)

      • avatar says

        Sir what happens to PROFIT / LOSS on sale of an asset and its TAX implications.

        In the above ex: at end of 4th yr asset value is NIL but sold for 10,000

      • Avatar of johnmoffat says

        At end of 4th year the asset value is not NIL !!

        4 years depreciation at 22500 per year reduces its value to 10,000.
        There is no profit or loss on sale.

        (And profit or loss itself is not what is relevant – it is the balancing charge or allowance that is relevant (from Paper F6). Here, as I explained, there is no balancing charge or allowance.)

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