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sir i don’t understand why in this question the calculation of TAD is so weird. We should be taking 15% of depreciable asset cost which is $35m less $7m(disposal proceeds) to give us $28m. And we should use 15% of $28m to arrive at TAD of $4.2m.
But somehow here in the question the examiner finds 15% on cost. 15%x35=$5.25m!
Clearly this is wrong, as in case of SLM of depreciation we deduct residual value from cost, before using rate given or useful life of project to arrive at TAD.
This is not wrong.
As I wrote in answer to one of your other posts, for tax allowable depreciation any sale proceeds are ignored when calculating the amount.
In addition, in this question, even if we were calculating financial accounting depreciation (which we are not doing), then when the policy is 15% straight line then it is always 15% of cost and any sale proceeds are irrelevant when calculating the depreciation (this is right back to Paper FA (was F3)).
sir factually you are right; i just confirmed with my F3 textbook. But just intuitively am struggling to understand, one thing. Our depreciable amount is Cost less residual value, so this amount should be spread between the each year of the useful life, as far as my understanding goes. how would you answer that?
We are looking at tax allowable depreciation which has nothing whatsoever to do with financial accounting depreciation (and is why, as you should remember, in Paper TX there is always an adjustment needed to get the taxable profit from the accounting profit).
It would be nonsense if the tax authorities allowed you to take an expected scrap value into account when calculating the amount allowable for tax – companies would simply change their estimate so as to get whatever taxable profit they wanted each year!!
For tax purposes the allowed amount each year is based on the original cost and it is only in the final year when we know what the actual sales proceeds are than an adjust is made i.e. the balancing allowance or balancing charge.
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