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) Total Cost for the assets includes the any other ancilliary cost of installing. In this case the cost will be

RM 100000.

b) The depreciation is computed under SYDM basis the productivty, in the initial years a machine/Asset will be more productive.

The calculations are as follows

Year	Depreciation Base	Remaining Life	Fraction	Depreciation	Book Value
1	80000	2	0.666667	53333.33	26666.67
2	80000	1	0.333333	26666.67	0
		3		80000

As the life of the asset is 2 years, the depreciation in the 3rd year is RM 26,666.67.

c) The book value shall be Zero in the ther year as per above calculations in b).

d) Earning After tax are as follows.

Earnings before tax are reduced by

Depreciation, Interest,any other extraordinary items to arrive at Earnng After tax. In this case it is as below

Earnings before tax	50,000.00
Depreciation	26,666.67
Earnings after Depreciation	23,333.33
Tax=30%	7,000.00
Earning After Tax	16,333.33

e) Recaptured Depreciaiton:- It is calculated at the time of sale of the asset. Since the business might have earned income in the ordinary course using the asset, as the time of the sale of the asset the depreciation is reinstate to the extent of the accumulated depreciation or gain which ever is less.

in this case if the asset is sold for Rm 40000 then the gain will be RM 40000 as the entire asset cost is depreciated. The Accumulated Depreciaiton is RM 50000 and gain is RM 40000, the entire RM 40000 shall be recaptured as Depreciation and shall be treated as ordinary income.

f) The Total Tax liability shall be the tax as calculated above in d) and Tax on RM 40000 in e) hence the total tax liability is (RM 40000X30%)+ RM 7000= RM 19000