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Hi Sir, there’s a question on BPP on Investment Appraisal called Hraxin Co. They said straight line depreciation over four and scrap of 500. My question is why does the answer scheme not use a balancing allowance on the 4th year and counts the depreciation amount in the 4th year?
The answer calculates the depreciation on a financial accounts basis as (5,000,000 – 500,000) / 4 = 1,125,000 per year. After three years the written down value is 5,000,000 – (3 x 1,125,000) = 1,625,000, and therefore there is a balance allowance of 1,625,000 – 500,000 = 1,125,000 in the 4th year.
(Strictly speaking, the tax allowable depreciation should have been calculated just on the original cost of 5,000,000 and should have been 5,000,000/4 = 1,250,000 per year for the first 3 years. In that case there would have been a balancing allowance of 750,000 in the 4th year. The examiner stated that either answer would get full marks.)
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