Accounting for Long Term Assets and Long Term Liabilities: 2

Problem No. 03
Padma Ltd. purchased a Plant six years ago at a cost of Tk.1,00,000 which could be used for more four
years. The installation charge was Tk.15,000 and estimated scrap value would be Tk.25,000 after the
useful life. The Company now wants to replace the Plant by a new one. Present realizable value of the
old one is expected to be Tk.1,30,000. Corporate Tax Rate is 40%, Gain Tax Rate is 30%, and Cost of
Capital is 10%. Determine Net Realizable Value if it is sold now.

Solution:

Step: 1)
Annual Depreciation = (Cost + Installation Charges – Scrap value) ÷ Useful life

Here, Cost = Tk.1,00,000; Installation Charges = Tk.15,000; Scrap Value = Tk.25,000

Useful life = 6 + 4 years = 10 years.

Therefore, Annual Depreciation = Tk.(1,00,000 + 15,000 – 25,000) ÷ 10 years

= Tk.9,000
Step: 2)
Accumulated Depreciation = Annual Depreciation × No. of years used
= Tk.9,000 × 6 years = Tk.54,000

Step: 3)
Book Value = Cost + Installation Charges – Accumulated Depreciation
= Tk.1,00,000 + 15,000 – 54,000 = Tk.61,000
Step: 4)
Total Gain = Sales Value – Book Value = Tk.1,30,000 – 61,000 = Tk.69,000

Step: 5)
Capital Gain = Sales Value – Original Cost = Tk.1,30,000 – 1,00,000 = Tk.30,000

Step: 6)
Revenue Gain = Total Gain – Capital Gain = Tk.69,000 – 30,000 = Tk.39,000

Step: 7)
Gain Tax = Capital Gain × Gain Tax Rate = Tk.30,000 × 30% = Tk.9,000

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Step: 8)
Revenue Tax = Revenue Gain × Corporate Tax Rate = Tk.39,000 × 40% = TK.15,600

Step: 9)
Total Taxes = Gain Tax + Revenue Tax = Tk.9,000 + 15,600 = Tk.24,600

Step: 10)
Net Realizable Value = Sales Value – Total Taxes = Tk.1,30,000 – 24,600 = Tk.1,05,400.

Problem No. 04 – Home Task

Meghna Ltd. purchased a Machine seven years ago at a cost of Tk.2,00,000 which could be used for
more five years. The installation charge was Tk.20,000 and estimated scrap value would be Tk.40,000
after the useful life. The Company now wants to replace the Machine by a new one. Present realizable
value of the old one is expected to be Tk.2,25,,000. Corporate Tax Rate is 40%, Gain Tax Rate is 30%, and
Cost of Capital is 10%. Determine Net Realizable Value if it is sold now.

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