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Hello John,
I am confused by layout in answers part of Kaplan book for P4, 2017.
Question 2 (Section A) and Question 5 (Section A).Both questions include tax allowable depreciation.
But in Question 1 it is treated like you did in Lectures – as tax saving % adding back.
In Question 5 – they at first deduct tax allowable depreciation from Cash receipts to get Taxable figure. After that they calculate taxation and finally add back tax allowable depreciation (not tax saving).
I can not undestand why does the author use the different methods. Could you please clarify that moment to me?
Thank you a lot for the lectures and your work.
I do not have the Kaplan book and so I cannot comment on the specific question.
However both methods are valid. Either calculate the tax on the profits ignoring depreciation and then calculate the tax saving on the allowances; or, alternatively subtract the allowances, then work out the tax, then add back the allowance because they are not a cash flow. (If I am not making it clear then check by F9 lectures on investment appraisal with tax).
Although both approaches end up giving the same result, usually the first method is the easier. However the one time you have to use the second method is when there are losses occurring, because then there is no tax in the year when the loss occurs, and the loss if carried forward to future years.
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