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Hi Sir , for june 2015 question 5 for part (a) . In the answer key, regarding the calculation on the tax allowable depreciation. Why did they minus the scrap value of $500 000 from the initial investment of $5m before calculating the tax allowable depreciation?
I’ve came across questions where the tax allowable depreciation is claimed on a straight line basis, in my lecture notes . But in those questions, they claimed tax allowable depreciation on the entire initial investment despite the machine having a scrap value.
In the financial accounts, the depreciation would certainly have been calculated taking the scrap into account (which is what the examiner has done in his answer).
However for tax calculations, it would more likely just have been based on the original cost (and then there would be a balancing charge in the year of sale). This is what I would have done.
The examiner wrote in his examiners comments that full credit was given for doing it either way (even though the final result would obviously be different).
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