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14 Brash Co (Kaplan Revision kit 2019) requirement (c) + (d)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › 14 Brash Co (Kaplan Revision kit 2019) requirement (c) + (d)

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • November 30, 2021 at 6:23 pm #642139
    farhataziz
    Member
    • Topics: 2
    • Replies: 3
    • ☆

    Greetings sir John,

    I hope you’re doing well, and I do appreciate your entire efforts for all the community sincerely.

    Scenario says : ” The lease will be over 5 years with lease payments of $146,000 annually in advance (at the start of each accounting period). Tax is payable 1 year after the accounting year-end, corporation tax rate is 25%…” and the cost of capital before-tax is 8%.

    Requirement : What is the present value of the tax relief on the lease payments, after tax ?

    My main issue here is which annuity factor to apply for years 2-6 tax relief of $146,000.
    I learned from your lectures that normally I pick AF 6 less AF 1, but solution is something else.

    Thanks for your attention.
    Yours, sincerely,

    December 1, 2021 at 7:46 am #642170
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51563
    • ☆☆☆☆☆

    I do not have the Kaplan Kit and so I cannot see what they have done in the answer.

    However there are two ways of dealing with an annuity from 2-6.
    One way is to take the 6 year annuity factor and subtract the 1 year factor.

    The other way is to say that it is lasting 5 years but is starting 1 year late (at time 2 instead of time 1) and so discount for one extra year. So the 5 year annuity factor multiplied by the 1 year factor.

    Both ways give the same answer (apart maybe for a slight rounding difference due to the tables only going to 3 decimal places, but rounding is irrelevant in the exam).

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