In: Accounting
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.
Answer-
The following information is given in the question:
Asset | date of purchase | cost | Life in years |
CNC machine | 1. Oct. 2019 | $110, 000 ( gst included) | 7 |
Holden car | 1. May. 2019 | $63, 000 | 5 |
The cost of machine excluding gst has to be calculated as depreciation will be calculated on original cost only and not on taxes.
Considering gst as 10%
Gst will be calculated as below
=total cost including gst * rate of gst/ (1+ rate of gst )
= $ 1,10000 * 10 / 110
= $ 10,000
Thus cost of maachine exvluding gst will be
= $1,10000- $10000
=$ 100,000
The depreciation on fixed assets for the year is generally allowed as deduction from the business income for that year while calculating taxable income for the year in accordance with the income tax law.
The company may adopt any method for depreciation There are two methods that are being used for calculation of depreciation. Calculations under both the methods are explained below.
1.Prime cost method
This is also called straight line method. In this method asset declines at a uniform rate over the useful life of the asset.
( taking financial year as 1.4.2019 to 31.3.2020 )
Depreciation for the year using prime cost method:
= cost of asset ÷ life of asset
Thus, using above formula
Depreciation on machinery =$ 100,000/7 = $ 14,285.71,
As machine was purchsed in second half of the year , deduction allowed will be:
$ 14,285.71/2= $ 7,142.85
Depreciation on molden car
= $ 63,000/5=$ 12,600.
As car is purchased in first half of the year depreciation expense will be fully allowed for deduction.
2.declining value method
This is also called written down value method. In this method asstet declines with a fixed percentage on yearly basis and every year the depreciation is calculated on the declined value and not on the cost of asset.
Assuming that machine depreciate at 15% per annum and car depreciate at 25% per annum
Calculation of depreciation using declining value method
Depreciation on machinery:
$ 100,000*15% = $ 15,000
As machine was purchsed in second half of the year,
Deduction allowed will be
$15,000/2= $ 7,500
Depreciation on car
$ 63,000*25%=$15, 750
As car purchased in first half of the year , full depreciation will be allowed as deduction.