Page 138 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 11

2.1 Tax depreciation

 Tax depreciation is used to reduce taxable profits, and the consequent
reduction in a tax payment should be treated as a cash saving arising from the
acceptance of the project.

 In the exam, tax depreciation is generally allowed on the cost of plant and
machinery at the rate of 25% on a reducing balance basis.

 When the asset is eventually sold, there may be a difference between the
reducing balance amount and the selling price. An adjustment must be made to
ensure that the company receives allowances equal to the total allowance
allowed (i.e. purchase price less final value). This is a balancing allowance.

 Half the tax is saved in the current year, and half is saved in the year
after.

132