ACCA FM · Chapter 7 · Question 7 of 10
A company buys an asset for $60,000 at the start of year 1 (time 0) and claims tax-allowable depreciation at 25% reducing balance from year 1. The tax rate is 30% and tax is paid (and tax savings received) one year after the year in which the related cash flow arises. What is the tax saving from the year 1 tax-allowable depreciation, and when does it arise?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $4,500 at the end of year 2
Explanation
Year 1 TAD = $60,000 x 25% = $15,000. Tax saving = $15,000 x 30% = $4,500. Because tax is paid one year in arrears, the saving arises at the end of year 2. $15,000 is the allowance itself rather than the tax saved.
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