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Week 5 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. I 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)

Answer 1

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 G.S.T has to be calculated as depreciation will be calculated on original cost only and not on taxes. Considering G.S.T as 10% G.S.T will be calculated as below:- G.S.T total cost including G.S.T * rate of G.S.T/ (1+rate of G.S.T) G.S.T = $ 1,10000 * 10/110 G.S.T = $ 10,000 Cost of machine excluding G.S.T will be = $1,10000-$10000 Cost of machine excluding G.S.T will be =$ 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: Depreciation = cost of asset - life of asset Depreciation on machinery =$ 100,000/7 Years = $ 14,285.71,

As machine was purchased in second half of the year, deduction allowed will be: Depreciation = $ 14,285.71/2= $ 7,142.85 Depreciation on modern 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 asset 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 purchased in second half of the year, Deduction allowed = $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.