Question

20a) What is meant by an accelerated depreciation method? What is the tax advantage of an accelerated depreciation method?

20b) The hallways and ceiling in a building are repainted. Is this a revenue expenditure or a capital expenditure? Type in 1 for revenue expenditure or type in 2 for a capital expenditure.

20c) The glass in two broken windows of a building are replaced. Is this a revenue expenditure or a capital expenditure? Type in 1 for revenue expenditure or type in 2 for a capital expenditure.

20d) A new wing is added to a building. Is this a revenue expenditure or a capital expenditure? Type in 1 for revenue expenditure or type in 2 for a capital expenditure.

Answer 1

Solution to 20A:

Accelerated depreciation is one of the many ways of depreciating assets. Accelerated depreciation is the method whereby the depreciation is charged at a decreasing rate, i.e., charging higher depreciation in the initial years of the life of the asset and then decreasing the depreciation charges over the later part of the life of the asset.

One of the type of accelerated depreciation method is double declining rate. Here, the depreciation is charges at double rate in the first year and then at reduced rate in the following years.

The TAX ADVANTAGE of the accelerated depreciation method is

Huge capital investment in assets is made in the initial year which creates liquidity crisis but capital expenditure is a non-tax deductible expenditure thus huge tax payment prose a threat to liquidity. This problem is solved by the accelerated depreciation method by increasing depreciation (Being tax deductible expense) and tax burden for the year and liquidity crisis is resolved.

Solution to 20B:

Repainting of hallways and ceiling is a (1) Revenue expenditure.

Solution to 20C:

The repairment of the glass in two broken windows of a building is a (1) Revenue Expenditure.

Solution to 20D:

A new wing is added to a building. It is a (2) Capital Expenditure.