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In: Accounting

Question A. Alex purchased a CNC machine on 1st October 2019 at a cost of $110,000...

Question

A. Alex purchased a CNC machine on 1st October 2019 at a cost of $110,000 (including GST). This machinery is estimated to have a useful life of seven years.

B. Alex purchased a Holden car on 1 May, 2019 at a cost of $63,000, estimated to have a useful life of five years.

Required: With reference to relevant legislation and case law, discuss and calculate what amount is allowed as a deduction for the decline in value of the machinery and the Holden car discussed above, using both prime cost and diminishing value methods. (10 marks, maximum 200 words)

Solutions

Expert Solution

given information,

CNC machine,act1,2019=$110,000(GST included)

holden car,may1,2019=$63,000

the cost of machine excluding GST hast to be calculated as depreciation will be calculated on original cost, not on taxes.

considering gst=10%

working

GST=total cost including GST x rate of gst/1+rate of GST

=$110,000x10/110

=$10,000

thus,

cost of machine excluding gst=$110,000-$10,000

=$100,000

the depreciation of a fixed asset for the year is generally allowed as a deduction from the business income for the year while calculating taxable income for the year in accordance with income tax law.

1)prime cost method

financial year =1/4/2019-31/3/2020

depreciation using prime cost method.

=cost of asset/life of the asset

=$100,000/7

=$14,285.71

the deduction allowed(purchased in second half of year)

=$14,285.71/2

=$7,142.85

so,

depreciation on holden car=$63,000/5

=$12,600

because the car is purchased in the first half of the year depreciation expense will be fully allowed for deduction.

2)declining value method

machine depreciates at 15% premium and car depreciate at 25% per annum

calculation of appreciation using declining value method

depreciation on machinery=$100,000x15%

=$15,000

as, the machine was purchased in the second half of the year,

the deduction allowed=$15,000/2

=$7,500

so,

depreciation on car=$63,000x25%

=$15,750

as car purchased in first half of year,full appreciation will be allowed as deduction.


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