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Hi Mr Moffat.
A little help on something very basic. Been ages since i cleared f9.
Suppose an asset costs 70.
Life is 4 years and depreciation is charged on straight line basis with a residual value 10.
The allowable depreciation would be 15 for T4? Or something else
Additionally. If tax is 30 percent and operating cash flows were 80 for example for T4 .
What would be tax charge for year T4 plz?
Is it 19.5 or something else
Lastly . What if we made a gain on disposal? Let’s say of 40 and our operating cash flow were 100 for last year of project.
100 +40 = 60 into tax percentage would be the tax charge?
If the tax allowable depreciation is on a straight line basis, then it would be 70/4 = 17.5 per annum for each of the first 3 years. (We are not doing financial accounts, and the tax authority base the TAD on the initial cost).
In respect of your second question, the tax flow will be 30% x (80 – 17.5) = 18.75
In respect of your third question, exam questions will not tell you the gain on disposal but will tell you the sale proceed. So if the sale proceeds were 50 in your example, then there would be a balancing charge of 32.5 (the excess of the sale proceeds over he written down value after three years) and therefore the tax outflow will be 30% x (100 + 32.5).
However do appreciate that it is much more common in the exam for the tax allowable depreciation to be calculated on a reducing balance basis rather than on a straight line basis, as it is in ‘real life’.
I do suggest that you watch my free Paper FM lecture on investment appraisal with tax for revision of the way we do the tax calculations, and then my free Paper AFM lectures on investment appraisal for the extra ‘tricks’ that can be relevant in Paper AFM.
Dear Mr Moffat,
Totally understood your explanation regarding the first two questions.
However for the third. I ignored whatever the sale proceeds could be that results to 40 gain on disposal.
In such a case if we made a 40 gain on disposal then . Operating cash flows for example 100 plus 40 into tax percentage. Would be the tax charge for the last year?
Kindly ignore my comment before this one. It is sorted.
However one more question came through regarding this. Just to confirm. So even in straight line basis we do not charge depreciation for the last year? I thought that was the condition for reducing balancing method only. Hence u came up with 32.5 balancing charge.
Seems like I really do need to watch your F9 lecture. Don’t Wana make silly mistakes in exams or being caught off guard.
Strictly the final year should be treated the way I wrote in my previous reply, whether it is straight line or reducing balance depreciation.
However you end up with the same net figure if you do have depreciation in the final year and a balancing charge, so it doesn’t really matter.
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