Question

Hoot Ltd acquired machinery at a purchase price of $31.6 million on April 1, 2020. Beyond the purchase price, the entity incurred shipping charges, customs duties, and installation fees of $3.8million,$2.2 million, and $0.9milition respectively.

Depreciation on the machinery is to be spread equally over an eight-year period, while capltal allowances àre to be. 8 ranted at a rate of 15% on the reducing balance. There are no other assets which give rise to taxable temporary differences.
The entity reported taxable profits of $49 million and $63 million for the years to April 2021 and April 2022 respectively. The rate of income tax opplicable to the entity is currently 35%. REQUIRED:
Calculate the applicable depreciation and capital allowances for both years.
Determine the deferred tax balances at the end of both years.
Determine the total tax expense for both years.
Showall relevant workings. Recommended timer 30 minutes

Answer 1

To calculate the applicable depreciation and capital allowances for both years, the adjusted cost of the machinery needs to be determined. The annual depreciation expense is then calculated by dividing the adjusted cost by the useful life, and the capital allowances are granted at a rate of 15% on the reducing balance. The deferred tax balances at the end of both years can be determined by multiplying the temporary differences by the tax rate, and the total tax expense for each year is the sum of the deferred tax balances and the tax payable.

Step-by-step explanation:

In order to calculate the applicable depreciation and capital allowances for both years, we need to determine the annual depreciation expense and the capital allowances based on the reducing balance method. For the machinery acquired on April 1, 2020, the purchase price of $31.6 million needs to be adjusted by the shipping charges, customs duties, and installation fees, which total $3.8 million + $2.2 million + $0.9 million = $7.9 million. The adjusted cost of the machinery is $31.6 million + $7.9 million = $39.5 million. The annual depreciation expense for the machinery is calculated by dividing the adjusted cost by the useful life, which is 8 years. Therefore, the annual depreciation expense is $39.5 million / 8 = $4.9375 million.

The capital allowances are granted at a rate of 15% on the reduced balance. The reducing balance is the adjusted cost of the machinery minus the cumulative depreciation. For the first year (April 2020 to April 2021), the capital allowances are calculated as follows:

Capital allowances = ($39.5 million - $4.9375 million) * 15% = $5.888 million. Similarly, for the second year (April 2021 to April 2022), the capital allowances are calculated as follows: Capital allowances = ($39.5 million - $4.9375 million - $5.888 million) * 15% = $4.4644 million. The deferred tax balances at the end of both years can be calculated by multiplying the temporary differences between the tax base and the carrying amount of the machinery by the tax rate of 35%. For the first year, the temporary difference is the capital allowance of $5.888 million, so the deferred tax balance is $5.888 million * 35% = $2.0608 million. For the second year, the temporary difference is the capital allowance of $4.4644 million, so the deferred tax balance is $4.4644 million * 35% = $1.56054 million. The total tax expense for both years is the sum of the deferred tax balances and the tax payable for each year. The tax payable is calculated by multiplying the taxable profits by the tax rate. For the first year, the tax payable is $49 million * 35% = $17.15 million. Therefore, the total tax expense for the first year is $2.0608 million + $17.15 million = $19.2108 million. For the second year, the tax payable is $63 million * 35% = $22.05 million. Therefore, the total tax expense for the second year is $1.56054 million + $22.05 million = $23.61054 million.