Jones Ltd plans to spend $90,000 on an item of capital equipment on 1 January 20X2. The expenditure is eligible for 25% tax?allowable depreciation, and Jones pays corporation tax at 30%. Tax is paid at the end of the accounting period concerned. The equipment will produce savings of $30,000 per year for its expected useful life deemed to be receivable every 31 December. The equipment will be sold for $25,000 on 31 December 20X5. Jones has a 31 December year?end and has a 10% post?tax cost of capital. What is the present value at 1 January 20X2 of the tax savings that result from the taxallowable depreciation?
A $13,170
B$15,828
C$16,018
D$19,827
I dont get the reasoning behind why we are considering the scrap value of 25k$ while calculating tax relief on tax allowable depriciation please can you tell me more on year 4th calculation
4th year b/d is 37968.75
According to the concept we should be doing depriciation on this amount but in answer its done this amount less scrap value and tax relief is calculated on the net amount
Please explain i am having doubt on the above answer
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2y ago#1You should watch the video on this topic
The asset is 90k
It is sold 3 years later for 25k
Every year until the year of sale they are allowed 25% tax allow dep until the final year when they get a balancing adjustment either as an allowance or a charge.
If the asset is depreciated to 37.9k as in this case then the scrap value of 25k is less than it’s worth (wdv) they get an allowance of 12.9k
If the written down value was say 17.9k and the scrap was 25k they would have a balancing charge of 7.1k
Or the written down value was say 37.9k and the scrap was 45k instead they would have a balancing charge of 7.1k
So in case of balance charge what would be treatment for tax saved on tax allowable depriciation will it be negative ?
2y ago#3A balancing charge is the tax liability that arises when you sell an asset for more than its recorded tax value after claiming Capital Allowances.
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