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Qust: 157 AGD Co (FMC, 12/05, amended)
AGD Co is a profitable company which is considering the purchase of a machine costing
$320,000. If purchased, AGD Co would incur annual maintenance costs of $25,000. The
machine would be used for 3 years and at the end of this period would be sold for $50,000.
Alternatively, the machine could be obtained under a 3-year lease for an annual lease rental of
$120,000 per year, payable in advance. The lease agreement would also provide insurance and
maintenance for a three-year period. The lease also contains an annual break clause allowing the
lease to be exited at the lessee’s discretion.
AGD Co can claim tax-allowable depreciation on a 25% reducing balance basis. The company
pays tax on profits at an annual rate of 30% and all tax liabilities are paid one year in arrears.
AGD Co has an accounting year that ends on 31 December.For Taxation (at 30% in
following year) = 8,000. I am not getting it can you please help me.Please do not copy out full questions because of copyright issues. I have the BPP Revision Kit and all the past real exam questions, and so you only need to give the name of the question 🙂
There are annual maintenance costs of $25,000. They are tax allowable and so will result in tax savings of 30% x 25,000 = $7,500 in the following year.
The examiner has shown everything to the nearest thousand and so has rounded up the 7,500 to 8 🙂Sorry for having posting the full question. Thank you very much for the clarification. Really appreciate your lectures. Keep the good job. God bless 🙂
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