Very short Questions and Answers
1. List out five blocks of depreciable assets and the rate of depreciation.
|
Five blocks
|
Depreciation method and rate
|
| a. Block A
b. Block B C. Block C d. Block D e. Block E |
DBM, 5%
DBM, 25% DBM, 20% DBM, 15% SLM, Cost/Life |
Note:
DBM : Diminishing balance method
SLM: Straight line method
2. What types of assets are subjected to depreciation under Income Tax Act, 2058?
Income Tax Act, 2058 has stated that a taxpayer can deduct deprecation in respect d depreciable asset owned and used by the tax payer during the year in the production d the tax payer’s income from business or investment.
3. List out any two examples of each block of depreciable assets.
Block A: Building, Bridge
Block B: Computer, Furniture
Block C: Bus, Car
Block D: Plant and machinery, Equipment
Block E: Patent right, Copy right, etc.
4. State briefly how the depreciable assets purchased under different dates are to be treated.
|
Period of Purchase
|
Absorbed Portion
|
Unabsorbed Portions
|
| 1st Shrawan-end of Poush
1st Magh-end of Chaitra 1st Baisakh-end of Ashadh |
3/3 or 100%
2/3 1/3
|
Nil
1/3 2/3
|
5. Briefly mention the two entities that are allowed additional depreciation allowance.
Two entities with allowed additional depreciation allowance are given below.
- An entity wholly engaged in operating a special industry.
- BOT or BOOT entities involved in infrastructure development
6. Identify the block of the following assets and the rate of depreciation.
a) Office and building
b) Furniture used in office
c) Computer kept for resale
d) Goodwill
ANSWER
a) Office and building Block A and 5%
b) Furniture used in office: Block B and 25%
c) Computer kept for resale: Not depreciable assets, it is trading stock.
d) Goodwill: Block E and the rate are calculated by dividing cost by life.
Short Questions and Answers
1. Briefly describe the provision of depreciation under Income Tax Act, 2058.
Depreciation is the depletion in the value of depreciable assets used in the business or investment by wear and tear, obsolescence, or the passing of time. Depreciation is allowed for a deduction on used depreciable assets owned by the person. For depreciation purpose, the depreciable assets have been classified into five blocks. The block-wise details and rate of depreciation are given in the following table:
| Block
|
Details of assets
|
Depreciation
|
| A | Building, Structures, and similar works of permanent nature | 5%
|
| B | Computers, data processing equipments, furniture, fixtures and office equipments
|
25%
|
| C | Automobiles, bus and mini bus
|
20%
|
| D | Construction and earth moving equipments, unabsorbed pollution control cost and R&D cost and any tangible assets not included in above blocks (e.g. plant and machinery)
|
15%
|
| E | Intangible assets (patent, copy rights, trade marks, software etc. Cost + Life rounded down to which are not included in Block ‘D’ assets) | Cost + Life
Rounded down to the nearest half |
Blocks A, B, C, and D are the blocks of tangible assets whereas Block E is the block of intangible assets. For Blocks A, B, C, and D, the diminishing balance method (i.e. written down method) is used while computing depreciation. But for Block E, the straight-line method is used.
The block-wise depreciation basis and depreciation are calculated as under:
| Opening depreciation basis
Add: Addition during the year (time-wise)
Less: Disposal during the year Depreciation basis Depreciation basis
|
XXX
XXX |
| XXX
XXX |
|
| XXX
|
Depreciation of a block = Depreciation basis of a block x Depreciation rate applicable to that block
Addition during the year in any Block is divided into two parts: absorbed and unabsorbed portion. Such division is based on the later of the time the asset is first owned/used or the cost is incurred. The table is given herewith to clarify the position:
| Time
|
Absorbed Portion
|
Unabsorbed Portion
|
| Shrawan first to Poush end
Magh first to Chaitra end Baishak first to Ashadh end
|
3/3
2/3 1/3
|
Nil
1/3 2/3
|
During the income year, only the absorbed portion of the addition is considered for calculating depreciation basis. The addition of assets falling under block A, B, C and D is included in respective blocks whereas in case of Block ‘E”, each asset is shown in separate block.
If the depreciation basis after deducting depreciation during an income year is less than Rs. 2,000, the whole amount is allowed as depreciation expenses during the income year. Gain (loss) on disposal of block of depreciable assets is treated as normal gain (loss) of business or investment.
In addition to normal depreciation, the following entities are allowed one-third additional depreciation of the rate prescribed on the assets falling under Blocks A, B, C and D:
entity engaged in building public infrastructure to transfer to the Government of Nepal and any other entity engaged in power generation, transmission or distribution of electricity.
entity wholly engaged in operating special industry under section 11.
entity wholly engaged in operating road, bridge, tunnel, ropeway or sky bridge constructed by the entity. Foun
entity wholly engaged in operating trolley bus or trams.
cooperative registered under Cooperatives Act, 2048 except involved in tax exempt transactions.
Likewise, a person generating energy power for own business purpose may claim to deduct 50% of the capitalized amount of the assets used to generate such power as depreciation allowance in the same year. Similarly, the person who uses fiscal printer and cash machine to issue invoices may claim to deduct in a lump sum the whole amount incurred for such machines as depreciation allowance in the same year.
NUMERICAL QUESTIONS
2. A company had opening WDV of an asset group was Rs. 10,00,000. New addition was made on 1st Chaitra for Rs. 900,000. No disposal was made during the year. Allowable depreciation on this block was Rs. 320,000.
Required: Identify the block of the asset.
SOLUTION
Depreciation basis = 10,00,000+(2/3×900,000) = 16,00,000
Allowable depreciation = Rs.320,000
Rate of depreciation 320,000 /16,00,000 × 100 = 20%
Block of assets = C
3. A company had opened WDV of computer pool amounting to Rs. 500,000. No addition was made. However, the company disposed a computer having book value Rs. 50,000 for Rs. 80,000.
Required:
a) Chargeable amount of depreciation
b) Is there any gain/loss to be included in income?
SOLUTION
Depreciation basis= (500,000 -80,000) = 420,000
a) Allowable depreciation= (25% of 420,000) = Rs.105,000
b) Gain/loss on sale to be included in income= Nil
4. Following is the details about the fixed assets of a company under Group C.
Depreciation base of assets on 1st Shrawan, previous year Rs. 3,000,000
The new addition of assets of the same group:
Marga, previous year Rs. 1,000,000
Chaitra, previous year Rs. 1,500,000
The company disposed of one of the assets having a book value of Rs. 1,000,000 on an opening date at par on Magh of the previous year. The company incurred repair expenses of Rs. 120,000 during the year.
Required:
(a) Amount of depreciation to be charged for the current year.
(b) Depreciation base of assets at the year-end.
SOLUTION:
Calculation of allowable depreciation of fixed assets falling under Group C.
| Particulars
|
Rs.
|
| Opening depreciation basis
Add: Absorbed additions: In Marga (Rs. 10,00,000 × 3/3) In Chaitra (Rs. 15,00,000 × 2/3)
Less: Disposal Depreciation basis |
30,00,000
10,00,000 10,00,000 |
|
50,00,000 10,00,000 |
|
| 40,00,000 |
a) Allowable depreciation = 20% of Rs. 40,00,000 = Rs. 8,00,000
b) Calculation of depreciation base of assets at year end
| Depreciation basis
Less: Depreciation Depreciation basis at year end
|
Rs.40,00,000
8,00,000
|
| Rs 32,00,000
|
Working Note:
Unabsorbed addition and repairs exceeding 7% of deprecation basis are capitalised in the beginning of next income year.
5. A Limited company provided the following details about its fixed assets under group B.
Depreciation base of assets as on 1st Shrawan previous year Rs. 1,500,000
New addition of such assets on 1st Bhadra previous year Rs. 400,000
Further addition of new item on 20th Jestha previous year Rs. 300,000
Disposed off one of the assets having book value of Rs. 400,000 on 1st Shrawan previous year during the year for Rs. 500,000
Required:
(a) Amount of depreciation to be charged for the current year
(b) Written down value (WDV) for next year.
SOLUTION
Calculation of current year’s depreciation and WDV for next year (Block B)
| Particulars
|
RS.
|
| Opening WDV
Add: Absorbed Additions On 1st Bhadra (400,000 × 3/3) On 20th Jestha (300,000 × 1/3)
Less: Disposal during the year |
15,00,000
10,00,000 100,000 |
| 20,00,000
5,00,000 |
|
| Depreciation basis
|
15,00,000 |
| Depreciation (25% of Rs. 15,00,000)
|
3,75,000 |
| WDV for next year [Depreciation basis – Depreciation + Unabsorbed addition).
|
13,25,000
|
6. ABC Co. Ltd. provided the following details of its fixed assets under different blocks.
| Block A (Rs.)
|
Block C (Rs.)
|
|
| Depreciated value of assets at the beginning of previous year
New addition of assets: On 1st Marga On 1st Chaitra
|
2,500,000
1,000,000 – |
1,500,000
– 600,000 |
| Deposited off value of assets during the period | 500,000 | 300,000 |
Required:
(a) Amount of depreciation to be charged in the current year
(b) Depreciation base of assets for next year.
SOLUTION
Computation of the current year’s depreciation and depreciation base for the next year
| Particulars
|
Block A assets
|
Block C assets
|
| Opening depreciation base
Add: Absorbed additions: On 1st Marga (Rs. 10,00,000 x 3/3) On 1st Chaitra (Rs. 900,000 x 2/3)
Less: Disposal |
25,00,000
10,00,000 – |
15,00,000
– 600,000 |
| 35,00,000
500,000 |
21,00,000
300,000 |
|
| Depreciation basis
|
30,00,000
|
18,00,000
|
| Depreciation rate
|
5%
|
20%
|
| Depreciation
|
150,000 | 360,000
|
| Depreciation basis after depreciation
|
28,50,000
|
14,40,000
|
| Depreciation base of assets for the next year
(Dep. basis after depreciation plus unabsorbed additions) |
28,50,000
|
17,40,000
|