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My question is regarding the TAX ALLOWANCE.
The machinery costs 1250, depreciating 10% on straight line basis for 5 years, after which sold at 500.
My train of thoughts is as follow:
Carrying amount
= 1250 – (1250×10%×5yrs)
= 625So gain on disposal
= carrying amount 625 – selling price 500
= 125So shouldn’t this 125 be taxed as balancing charge instead of allowance?
No – if the carrying amount is more than the scrap value, then the difference is a balancing allowance.
(You should be happy with the logic from both Paper F6 and Paper F9 – the total allowances given are the difference between the cost and the scrap value, so in total 750. The year by year allowances come to a total of 625, so the balancing allowance or charge is simply to make up the full total allowed, Here they are entitled to 750 in total, the have only had 625 in total, so they are entitled to an extra allowance – the balancing allowance – of the extra 125)
If you are still unsure then do watch my free Paper F9 lectures on this (because this is revision of F9).
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