Consider a company which purchases a machine for 35000. The machine can be used to produce...

Consider a company which purchases a machine for 35000. The machine can be used to produce a good for 5 years. After 5 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 28000, with a Writing Down Allowance in Year 1 of 7000.
2. b) The Written Down Value at the end of Year 5 is 11468.80.
3. c) If we have for the resell value x that x= 20000, the company is liable for a balancing charge
  
  in Year 5.
4. d) If we have for the resell value x that x= 15000, the company is liable for a balancing allowance in Year 5.
5. e) The Writing Down Allowance in Year 2 is 5600.

Expert Solution

The following statement is incorrect.

d) If we have for the resell value x that x= 15000, the company is liable for a balancing allowance in Year 5.

If resell value is greater than the written down value at the end of life of the machine, the company is liable for a balancing charge. If the resell value is lesser than the written down value at the end of life of the machine, the company is liable for a balancing allowance. In this case, at a resell value of 15000, the company will be liable for a balancing charge in year 5 since the written down value at the end of year 5 (11468.8) is lesser than the resell value (15000).

Statement a, b, c and e are correct. Justification follows:

Year	Written down value at the beginning of the year	Depreciation @ 20% of written down value	Written down value at the end of the year
1	35000	7000	28000
2	28000	5600	22400
3	22400	4480	17920
4	17920	3584	14336
5	14336	2867.2	11468.8

As can be seen from the table above, statements a, b, c and e are correct.

jeff jeffy answered 1 year ago

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