Very Big Ltd is a large business taxpayer that leases most of its assets, and only owns the following assets.
Asset A which had been purchased a few years ago had a life expectancy of 8 years and cost $1,500. Its opening adjustable value for the current year was $985.
Asset B which was bought on 1 November CY at the cost $760. It had a life expectancy of 5 years.
Asset C bought in the PY at a cost of $20,000 and had an opening adjustable value of $18,800. It had a life expectancy of 15 years.
Asset D bought on 1 August CY for $220,000, and the asset has an effective life of 8 years.
State ALL the answers that are CORRECT.
Group of answer choices
Very Big Ltd will be able to claim depreciation of at the rate of 25% on $220,000 for 334 days for Asset D.
Very Big Ltd can allocate both Assets A and B to a Low-Value Pool and depreciate them at 37.5%.
If Very Big Ltd has created a Low Value Pool, it must not put Asset A into a Low Value Pool as it can claim depreciation at the rate of 25% for the current year instead of 18.75% if allocated to the pool.
Very Big Ltd will be able obtain a deduction of $2506 for the current year for Asset C.
In the realm of business taxation and asset management, Very Big Ltd, a prominent player in the business landscape, follows a strategy of leasing most of its assets while also owning a select few. This essay delves into the depreciation and asset management decisions faced by Very Big Ltd, exploring the nuances of their owned assets – Asset A, Asset B, Asset C, and Asset D.
Asset A, acquired several years ago, boasts a life expectancy of 8 years and was purchased for $1,500. In the current year, its opening adjustable value stood at $985. Very Big Ltd is eligible to claim depreciation for Asset A. The correct rate of depreciation for this asset would be 25%, leading to a deduction based on the asset’s current value. However, considering that this asset is not allocated to the Low-Value Pool, it does not receive the benefit of the increased depreciation rate of 37.5% that the pool allows.
Asset B was procured on 1 November CY at a cost of $760 and boasts a life expectancy of 5 years. Very Big Ltd can claim depreciation for this asset, but since it is not a part of the Low-Value Pool, it will be depreciated at the applicable rate for its individual asset category.
Both Assets A and B can be allocated to the Low-Value Pool, and they would then be subject to a higher depreciation rate of 37.5%. This strategy could be advantageous for Very Big Ltd, as it would accelerate the depreciation process, allowing for a larger deduction in the near term. However, it’s important to note that Asset A would actually be better off not being allocated to the Low-Value Pool, as its individual depreciation rate of 25% is higher than the pool’s rate of 18.75%. Therefore, allocating Asset A to the Low-Value Pool would not be optimal for Very Big Ltd.
Asset C, acquired in the previous year at a cost of $20,000, boasts a life expectancy of 15 years. Its opening adjustable value was $18,800. Based on the given information, Very Big Ltd will be able to obtain a deduction of $2506 for the current year for Asset C. This deduction is calculated by applying the relevant depreciation rate to the asset’s value.
Asset D, purchased on 1 August CY for $220,000, has an effective life of 8 years. Very Big Ltd will be eligible to claim depreciation on this asset at the rate of 25%. However, the statement that the business can claim depreciation for 334 days is not entirely accurate. Depreciation is typically calculated on a yearly basis, so the calculation might need adjustment based on the specific depreciation method used.
Very Big Ltd’s asset management and depreciation strategies play a crucial role in determining the tax implications and financial performance of the company. While allocating assets to the Low-Value Pool might seem advantageous, careful consideration must be given to individual depreciation rates to ensure optimal tax benefits. Asset A’s higher individual rate makes it more suitable for separate depreciation, highlighting the importance of tailoring strategies to each asset’s unique characteristics. Ultimately, Very Big Ltd’s decisions regarding depreciation and asset allocation will significantly impact its financial outlook and tax liabilities.
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