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Good Day Sir,
I am preparing f9 for this June Session 2018 and I am self-studying from combination OT, Kaplan and bpp book.
It would be your great support if you help me in this so my problem is that was one question in Kaplan which I understood clearly except the timing of tax saving in year 1 whereas tax is actually paid in year 2 – even though in the question it said that tax will be paid one year in arrears .
here is the question
A company buys an asset on the last day of the accounting period for $26,000. It will be used on a project for three years after which it will be disposed of at $12500
Tax is payable at 30% one year in arrears, and tax-allowable
depreciation is available at 25% reducing balanceIf net trading income from the project is $16,000 pa and the cost of
capital is 8% calculate the NPV of the project.?here is the answer:
y0 y1 y2 y3 y4
Net trading inflows 16,000 16,000 16,000
Tax payable (30%) (4,800) (4,800) (4,800)
Initial investment (26,000)
Scrap proceeds 12,500
Tax relief on tax-allow
depreciation
1,950 1,463 1,097 (459)
Net cash flows (26,000) 17,950 12,663 24,797 (5,259)
DF @ 8% 1.000 0.926 0.857 0.794 0.735
PV (26,000) 16,622 10,852 19,689 (3,865)
NPV $17,298Sir why tax relief is not given at year 2 same as tax payable at a year 2 as it said Tax will be paid one year in arrears? As I am confused in some questions they follow the method of payment so tax relief and tax payment follows the same method regardless when the asset is actually purchased. I am unable to understand clearly
I will be looking forward to your reply and I will be really Thankful and appreciate your support and guidance
Thank you Sir
It is because the asset is bought on the last day of an accounting period.
So the investment is at time 0.
The capital allowances are calculated at the end of the accounting period which is time 0, and the tax benefit resulting is 1 year later, which is time 1.
This is very unusual in the exam – in fact it only really becomes relevant in a lease and buy question (and I explain this point in the lectures on this).
Usually (in fact more or less always in the exam) we are not told whether it is start or end of an accounting period and we always assume that the investment was on the first day of an accounting period. The capital allowances are calculated at the end of the accounting period (which is time 1) and the tax saving occurs one year later which is at time 2.
If you are watching the lectures, then you don’t really need the study texts. Much, much more important is that you have a Revision Kit (Kaplan call it Exam Kit) because they are full of past exam and other exam standard questions, and practice at these questions is vital.
thank you so much Sir, you have cleared all my doubt in such a simple way. I have just recently started watching your lectures and they are amazing .I am doing Kit as well
I hope everything goes fine in exam
and once again thanks for your help and have a good day Sir 🙂
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