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Dear John,
I wonder if you can provide any guidance to a problem I am facing. The question I am referring to is ‘March/June 2018 – Q3: Arthuro Co’.
On calculating the dividend capacity, it all seems very familiar and as per my understanding. However, I am lost when it comes to handling the NCA in notes #3 & #4. I have had a look at the marking scheme and it doesn’t make sense to me.
To be more specific, they have calculated 16,300 for Cash Received(addition); why would we add the PoD to the Cost and then minus the depreciation? Also, why would they minus the PoD(on a separate line) to the calculation of the Dividend Capacity?
Any guidance you can give, where I can read/learn more about the thought process of how this is calculated would be greatly appreciated.
Have a nice day.
Regards,
Alex
I am assuming that you are referring to workings 1 in the answer.
As per financial accounts (which is what this is), the profit on disposal is the cash received less the net book value of the assets.
Therefore the cash received = profit on disposal plus net book value.
The profit on disposal is $5.9M, and the net book value is $35M – $24.6M = $10.4M
Therefore the cash received must have been 5.9 + 10.4 = $16.3M
Dear John,
Could you pls explain how the dividend capacity required has been derived as (90*4/3)million*0.74. The right issue as per the question is 1 for 3.
The rights issue is indeed 1 for 3. So for every 3 shares before, there are now 4 shares.
There were 90M shares, so the rights issue was of 30M shares, so there are now 120M shares (which is the same as 90 x 4/3).
Sir, I understood the cash inflow of 16.3m.
But I’m unable to understand why has the ‘Profit on Sale of NCA’.
Why is it subtracted after charging the tax on operating profits?
Shouldn’t it have been subtracted before charging the tax?As per note 3, the operating profit is already after charging depreciation and after including the profit on sale. Neither the depreciation nor the profit on sale are cash items and therefore need adjusting for to get the cash available for dividends, but this does not affect the tax payable.
Exactly my point. If we deduct tax on operating profits before removing the profit on sale, that means we are taxing the Profit on Sale of Asset as well. And logically, should it be taxed with the operating profits? (considering it is not an operating activity and hence shouldnt be included in the OP)
Note 3 says specifically that the operating profit is after charging depreciation and bringing in the profit on sale. It also says that depreciation is allowable for tax and that the profit on sale is fully chargeable to tax.
So the tax is simply calculated on the operating profit less the interest.
Obviously, as in all exams, adjusting for the non-cash items does not itself affect the tax.
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