Im working on an Assignment and have a situation where by doing a 20% per annum straight-line depreciation on some assets(without being given a scrap value or a time line,but being given a date and value of sale of the asset) i am making a profit on everything at the time of sale.
Is that possible or do you think i am messing this up?
hi, without having to make another tread on depreciation i thought i should as my question here so here goes .....
I have some fixed asset (computers/laptops) that have been depreciated on 25% straight-line method hence lifespan of 4 years assumed
So here are my questions, using basic figures as examples
Total Fixed Asset Cost : £1,000 25% Depreciation per year : £250
SITUATION 1 Assuming I am in year 4, and as I have read, there is no depreciation charge in year of sale Assuming as well that WDA/Capital allowances given were at a rate of 20% yearly ..... Assuming that the Fixed assets have gone through some bashing/fallen out pieces that their resale value is next to nothing or even a case of disposal as scrap...
Sale/Scrap 0 ------------- Loss Chargeable to P&L A/C 250 -------------
Q1 -> Will I charge this to P&L A/C to reduce the overall Profits? Q2 -> What effect does this have on WDA allowances for the Tax year?, considering(.... rather should I say guessing..) that it is a pooled asset, WOULD some sort of cost need to be deducted from the pooled asset when trying to calculate WDA for current year....?
SITUATION 2 Assuming I am in year 5, In this case i guess there is no further depreciation to record in the books Assuming as well that WDA/Capital allowances given were at a rate of 20% yearly ..... Assuming that the Fixed assets have gone through some bashing/fallen out pieces that their resale value is next to nothing or even a case of disposal as scrap...
Sale/Scrap 0 ------------- Loss/Gain Chargeable to P&L A/C 0 -------------
Q1 -> same as Q2 in Situation 1
FINALY 1) If not taking into account replacements for Assets. Considering the two situations above, it seems that scraping/disposal of the Fixed assets in their final year is financially beneficial ..? or have i just completely missed the point? 2) coming back to the notion that "No depreciation charges in year of disposal...... because it will not affect final outcome.....", I really dont understand this. I can see that as far as the Balance sheet goes it truely has no effect because the closing net book values of remaining assets will not include sols/scrapped assets..... But sureley there has got to be an impact on P&L account ?
if there is no income from the sale there is no profit. Your figures are correct and the loss in scenario 1 is allowable on the P&L
Remember to think of depreciation as merely a way of spreading the cost of an asset in to the P&L over a period of time. All of it needs to be claimed at some point.
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If the asset qualfies for AIA you will get 100% tax relief of the cost of £1k in the first year.
If not then then you will get 20% WDA each year ie £200 yr 1, £160 yr 2, £128 yr 3, £102 yr 4 and so in indefinitely if a pool asset until the pool can be written off. One of the drawbacks of pooled assets is that they carry on in the pool even if the asset is subsequently sold/scrapped. If you are claiming WDA of 20% each year then in theory you will never get the full relief as the cost will never be fully written down. Will take you about 10 years to get tax relief on about 90% of the original cost. So always better where you can to claim AIA and get 100% relief straight away.
So in effect if you depreciate an asset over 4 years you will fully write off the cost of £1000 after 4 years from an accounting viewpoin but will only be able to claim tax relief of £590 (£200+£160+£128+£102) over the same period if claiming 20% WDA each year.
Actually, i have another question. Assuming a situation where 100% AIA was given for an asset which means full deductions for calculating Taxation for the year.
If the Asset was disposed off at a loss (as in situation1), why can you then deduct the loss from P&L again.....? Is it because the AIA given in Year1 is mereley for affect tax for the year hence does not actually affect the P&L account?
From a tax viewpoint any depreciation and loss/gains from selling assets are disregarded when working out your taxable profits.
For instance say you have the following
Accounting profits before tax of £10k Included in this is £1k depreciation and £500 loss on the disposal of an asset You have bought an asset in the year for £5k.
Your accounting profit is £10k
Your taxable profit is £10k + £1k depn + £500 loss on disposal - £5k AIA = £6.5k taxable profits less any capital allowances on your WDV brought forward.
So from a tax viewpoing and depreciation, loss on disposal is disregarded to arrive at your taxable profits.
