Question

MCCB Corp. bought a machine since 3 years ago for RM 90,000 with a remaining useful life of 2 years and a salvage value of RM 20,000. The company had also incurred additional costs of transportation and training staff of RM 10,000 and RM 5,000 respectively when purchasing the machine. At present, this machine can be sold at RM 40,000 in a market. The company has earnings before tax of RM 50,000 and it usually adopts the sum of year’s digit method (SYDM) as a depreciation strategy. If the corporate tax rate is 30 percent and the capital gain tax rate is 15 percent, determine the following:

a) Determine the cost of asset

b) Determine the annual depreciation in the third (3rd) year based on the sum of years digit method (SYDM)

c) Determine the book value in the third (3rd) year based on the sum of years digit method (SYDM)

d) Determine the earnings after-tax

e) Determine the recaptured depreciation after tax:

f)  Determine the total tax liability

Answer 1

a) Determine the cost of asset

Cost of Assets = Purchase Price + cost of transportation + Training Staff

Cost of Assets = 90,000 + 10,000 + 5,000

Cost of Assets = 105,000 RM

(B)

	Cost of Assets =	105,000.00
Year	Depreciation Base	Remaining Life	Weights	Depreciation	Book Value
1	85,000.00	5	0.33	28,333.33	76,666.67
2	85,000.00	4	0.27	22,666.67	54,000.00
3	85,000.00	3	0.20	17,000.00	37,000.00
4	85,000.00	2	0.13	11,333.33	25,666.67
5	85,000.00	1	0.07	5,666.67	20,000.00
		15

Annual depreciation in the third (3rd) year =17,000

(C) Determine the book value in the third (3rd) year based on the sum of years digit method (SYDM)

Book value in the third (3rd) year based on the sum of years digit method (SYDM) =37,000

(D)

Earning After tax are as follows
	YEARS	1	2	3	4	5
	Earnings before tax	50,000.00	50,000.00	50,000.00	50,000.00	50,000.00
	Depreciation	28,333.33	22,666.67	17,000.00	11,333.33	5,666.67
	Earnings after Depreciation	21,666.67	27,333.33	33,000.00	38,666.67	44,333.33
	Tax=30%	6,500.00	8,200.00	9,900.00	11,600.00	13,300.00
	Earning After Tax	15,166.67	19,133.33	23,100.00	27,066.67	31,033.33

(E)

Recaptured Depreciaiton:- It computed at the time of sale of the asset.Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis.

If asset sold at 40,000 then full gain of 40,000 eill be treated as  treated as ordinary income.

(f)

Capital Tax Liability = 40,000x30% =12,000

Income Tax = 9900

Total Tax = 21900