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In this qs part b ii) deferred tax arising on finance lease i didnt understand how to find the carrying amount of the leased asset and hence what the deferred tax is,pls help how to do this part?
The carrying value is the fair value of the asset at the date of the inception of the lease less one year’s depreciation. So 12 million minus one year’s depreciation at the rate of 20% (2.4 million) giving us a carrying value of 9.6 million.
So far as the tax base is concerned, because the asset does not itself qualify for capital allowances, the company is able to claim full tax relief on the capital element of the finance lease payment. To arrive at that figure, we need to calculate the interest element of the instalment which has been paid of 3 million.
At the effective interest rate of 8% based on the amount “borrowed” of 12 million, the finance lease interest for the year is 8% x 12 million = 960,000. That’s the interest element of the instalment. Therefore, the capital element of the instalment is 2,040,000.
Deduct 2,040,000 from the obligation account figure of 12 million and that leaves us with 9,960,000 which is the tax base. That, in turn, allows us to work out the extent of the timing difference (9.6 compared with 9.96) a difference of .36
Apply the tax rate to that timing difference and that gives us the figure for a deferred tax asset of 30% x .36 = 108,000
OK?
@mikelittle said:
The carrying value is the fair value of the asset at the date of the inception of the lease less one year’s depreciation. So 12 million minus one year’s depreciation at the rate of 20% (2.4 million) giving us a carrying value of 9.6 million.So far as the tax base is concerned, because the asset does not itself qualify for capital allowances, the company is able to claim full tax relief on the capital element of the finance lease payment. To arrive at that figure, we need to calculate the interest element of the instalment which has been paid of 3 million.
At the effective interest rate of 8% based on the amount “borrowed” of 12 million, the finance lease interest for the year is 8% x 12 million = 960,000. That’s the interest element of the instalment. Therefore, the capital element of the instalment is 2,040,000.
Deduct 2,040,000 from the obligation account figure of 12 million and that leaves us with 9,960,000 which is the tax base. That, in turn, allows us to work out the extent of the timing difference (9.6 compared with 9.96) a difference of .36
Apply the tax rate to that timing difference and that gives us the figure for a deferred tax asset of 30% x .36 = 108,000
OK?
sir I am impressed its way too detail. I loved the way you explained the stuff.
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