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hello
in the above question the revision kit gives the answer of 3.68 which is the amount if you take the 19.28 – 7 X .25 x .3
However, if they were writing it off without the sale the final year balancing entry should be 19.29 x 0.3 (remember they say they left out the 7m)
therefore the tax relief already included in their figure must be 19.29 x .3 = 5.79
And if you do the calculation taking into account the 7m which gives 3.68
So therefore should you not deduct the 3.68 from the 5.79 and rather than paying yourself tax relief of 3.68 rather pay the taxman extra 2.11
In other words should the answer not be (2.11) instead of 3.68???Thank you
In the year of sale (year 6), then if they had done it correctly and accounted for the sale, then there would have been no WDA and instead a balancing allowance of 25.70 – 7 = 18.70. Therefore a tax saving of 18.70 x 30% = 5.61.
In the original calculations they had not brought in the sale and so just had a WDA of 6.43, therefore a tax saving of 6.43 x 30% = 1.93.
So correcting it means an extra tax saving of 5.61 – 1.93 = 3.68.
Hi John
Not arguingY0 150 x .5 x .3 = 22.5
Y1 75 x .25 x .3 = 5.63
50 x .5 x .3 = 7.50 7.5 + 5.63 = 13.13Y2 56.25 x .25 x .3 = 4.21
18.75 x .25 x .3 = 1.41 4.21 + 1.41 = 5.62Y3 42.18 x .25 x .30 = 3.16
14.06 x .25 x .30 = 1.05 3.16 + 1.05 = 4.21Y4 31.64 x .25 x .3 = 2.37
10.55 x .25 x .3 = 0.79 2.37 + .79 = 3.16Y5 23.73 x .25 x .3 = 1.78
7.91 x .25 x .3 = 0.59 1.78 +.59 = 2.37Y6 17.80 x 0.3 = 5.34
5.93 x 0.3 = 1.78 5.34 + 1.78 = 7.12 (without 7m sale taken into account)Y6 17.8 + 5.93 – 7 = 16.73 x 0.3 = 5.01
5.01 is the figure it should be and 7.12 is the figure that it already is due to 7m not taken into account. So therefore it should be 5.01 – 7.12 which means you owe the tax man 2.1 (you took too much)
That is my working so when you show me yours I could not reconcile it
Please show me where i am wrong
thank you
I don’t know why you have typed out all your workings, because all the workings are in the examiners answer.
Also, you don’t need to all the workings for the two investments separately. It will give the same answer (apart from the fact you have made a mistake) but takes a lot longer and is not what happens in practice either.
Your mistake is in Y2. The written down value of the first investment is correct as 150 – 75 – (25% x 75) = 56.25 and so the tax saving is 56.25 x 25% x 30% = 4.21
However, the written down value of the second investment is 50 – 25 = 25, and so the tax saving is 25 x 25% x 30% = 1.88.
So a total tax saving of 4.21 + 1.88 = 6.09
Obviously the mistake carries on through the other years.The much better way is not to keep the two investments separate after Y1 (because from then on the WDA is 25% of both of them).
So at the end of Y1, the total written down value is 56.25 + 25 = 81.25. Therefore the WDA in Y2 is 25% x 81.25 = 20.31 and the tax saving is 30% x 20.31 = 6.09.
At the end of Y2, the total written down value is 81.25 – 20.31 = 60.94.
Therefore the WDA in Y3 is 25% x 60.94 = 15.24, and the tax saving is 30% x 15.24 = 4.57
….and so on.In addition, you don’t need to calculate the tax saving each year – they have already been accounted for in the flows given in the question, so it is again wasting time. All you need is to calculate the written down value each year and then deal with the sale at the end.
Do see the answer because it shows the calculation of the capital allowances.
Hi John
You are right, the answer of the 3.68 is the same answer I get if the capital allowances were calculated including the revenue from the 7m sale
It is a badly worded question which i fear is a way ACCA may get lots of rewrites. they do claim the 7m revenue has been taken into account already, just not the tax relief.
So if i get really simplistic they just want the tax relief for Y6 and the rest is just to confuse you into failing and writing again??/
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