In: Accounting
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)
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.