Question

19. Consider a company which purchases a machine for £25′000. The machine can be used to produce a good for 4 years. After 4 years, it has a disposal or resell value of x which is subject to taxation. The company operates in a country where the tax code allows for a 20% Writing Down Allowance (WDA) on capital expenditures. Which of the following statements is not correct?

    1. a) The Written Down Value at the end of Year 1 is £20′000, with a Writing Down Allowance in Year 1 of 5000.

    2. b) The Written Down Value at the end of Year 4 is £9980.

    3. c) If we have for the resell value x that x= 8000, the company is eligible for a balancing

       allowance in Year 4.

    4. d) If we have for the resell value x that x= 12′000, the company is liable for a balancing charge in Year 4.

    5. e) The Writing Down Allowance in Year 3 is 3200.

Answer 1

Year	1	2	3	4
beginning value of asset	25000	20000	16000	12800
WDA	20%	20%	20%	20%
WDA value	5000	4000	3200	2560
Ending value of asset	20000	16000	12800	10240

a
Correct
As seen from the WDA calculation table above, the Written Down Value at the end of Year 1 is 20000, with a Writing Down Allowance in Year 1 of 5000.

b
Incorrect
As seen from the WDA calculation table above, the Written Down Value at the end of Year 4 is 10240 and not 9980

c
Correct
At the end of year 4, the written down value of the asset is 10240. This value is higher than the resale price x = 8000 at the end of year 4. Hence, the company is still eligible for a balancing allowance in year 4.

d
Correct
At the end of year 4, the written down value of the asset is 10240. This value is lower than the resale price x = 12000 at the end of year 4. Hence, the company is not eligible for a balancing allowance in year 4. it owes a liability in year 4

e
Correct
As seen from the WDA calculation table above, the Writing Down Allowance in Year 3 of 3200.