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Dear Sir,
ACCA released recently the September/December 2020 exam samples with answers. In Colvin Co, there is a note saying:
‘The project will require an immediate investment of CL75m in land and buildings and CL700m in plant and machinery. Tax allowable depreciation is available on plant and machinery on a straight-line basis at an annual rate of 25% on cost. Colvin Co’s finance director believes the plant and machinery will have a zero residual value at the end of the four years. The land and buildings will be disposed of at the end of the project and their tax exempt value is expected to
increase at an annual rate of 30% throughout the four-year life of the investment’.The answer to the example states that at year 4 the value of the land will be 214.2 – this is calculated based on the last sentence in the above paragraph – tax exempt value is expected to increase at an annual rate of 30% throughout the 4 year life of the investment’.
Could you please kindly explain how do we know what is the tax exempt value (would that be CL75m or something different?) and how this 214.2 is calculated? I tried many times but every time I get different result than in the answers to the exam.
Thank you in advance for your help.
The value of the land is increasing at 30% per year from its initial cost of CL75.
Therefore the value at the end of 4 years is 75 x (1.3)^4 = CL214.2
The sales proceeds are always exempt from tax. If they had been getting tax allowable depreciation then there would be a balancing charge or allowance in the final year as normal, but here it had not been getting capital allowances (TAD).
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