shunmas
12-05-10, 09:19 PM
Hi !
In June 2008 Q4, the question states:
"...SC Co. pays tax 30% per year in the year in which the taxable profit occurs. Liability to tax is reduced by capital allowances on machinery (tax-allowable depreciation), which SC Co. can claim on a straight-line basis over the four-year life of the proposed investment. The new machine is expected to have no scrap value at the end of the four-year period."
In Answers, the examiner has done this:
Capital Allowances = Cost/Life = $1 m/4 yrs = $250,000 per year [for all four years]
In December 2008 Q3, the question states:
"...Rupab Co. pays taxation one year in arrears at an annual rate of 25%. Capital Allowances (tax-allowable depreciation) on machinery are on a straight-line basis over the life of the asset."
In Answers (workings), the examiner has done this:
Capital Allowance = Cost/Life = $2.5 m/5 yrs = $500,000
Annual Tax Benefit = $500,000 x 0.25 (25%) = $125,000 per year [for all five years]
The Question is:
Why in June 2008 Answers, the examiner has not calculated the tax benefit as he has done in December 2008 Answers ? He put $250,000 for all four years in June Answers and in December Answers, he is multiplying the capital allowance further with tax rate. Why is that so?
Thanks
In June 2008 Q4, the question states:
"...SC Co. pays tax 30% per year in the year in which the taxable profit occurs. Liability to tax is reduced by capital allowances on machinery (tax-allowable depreciation), which SC Co. can claim on a straight-line basis over the four-year life of the proposed investment. The new machine is expected to have no scrap value at the end of the four-year period."
In Answers, the examiner has done this:
Capital Allowances = Cost/Life = $1 m/4 yrs = $250,000 per year [for all four years]
In December 2008 Q3, the question states:
"...Rupab Co. pays taxation one year in arrears at an annual rate of 25%. Capital Allowances (tax-allowable depreciation) on machinery are on a straight-line basis over the life of the asset."
In Answers (workings), the examiner has done this:
Capital Allowance = Cost/Life = $2.5 m/5 yrs = $500,000
Annual Tax Benefit = $500,000 x 0.25 (25%) = $125,000 per year [for all five years]
The Question is:
Why in June 2008 Answers, the examiner has not calculated the tax benefit as he has done in December 2008 Answers ? He put $250,000 for all four years in June Answers and in December Answers, he is multiplying the capital allowance further with tax rate. Why is that so?
Thanks