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Dear sir,
There is a straight-line basis for the Capital allowances for $3m plant and machinery and 0.4m scrap value.
(3-0.4)/4=$0.65m.However there is a tutorial note which is unclear:
“You could also have assumed that capital allowances were $0.75m in
the first 3 years and $0.35m in the final year. You would gain full credit for this.”What does this note mean?
Thanks
The answer has calculated the tax allowable depreciation in the same way as we calculate financial accounting straight-line depreciation i.e. the scrap proceeds have been subtracted.
As you should remember from Paper FM, this is strictly wrong and the tax allowable depreciation should be based just on the initial cost and so should be 3/4 = 0.75 per year until the final year. In the final year there is the balancing allowance of 0.35 (the difference between the scrap proceeds and the tax written down value).
Although strictly it is the second figures that are correct, the examiner allowed either.
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