Tax Accounting

Lecture 09
Depreciation Expense
Example (1): Depreciation of buildings, contractions,
etc.:
ABC firm owned a factory which was built on January 01, 2005 at a cost of L.E.200,000.
On March 2016, the firm built a new factory at a cost of L.E.400,000 of which the land
purchase for this building costs L.E.100,000 the firm built an office as a reception lodge
at a cost of L.E.60,000. On May 01, 2016 the firm renewed its old factory at a cost of
L.E.70,000 of which L.E.10,000 repairs expenses.
Additional information :
The new building was used from June 01, 2016.
The book value of the old factory on January 01, 2016 was L.E.100,000.
The accounting period ends on December each year.
Required:
Compute the taxable depreciation expense for 2016
Solution:
Amounts subjected to depreciation L.E.
A. Original cost of old factory 200,000
B. Renewable cost as from 01/05/2016
70,000 – 10,000 60,000
C. Original cost of the new factory as from 01/03/2016:
400,000 - 100,000 300,000
D. Cost of reception office as from 01/03/2016 60,000
Total 620,000
Taxable depreciation expense : (31/12/2016)
200,000 × 5% × 12/12 10,000
60,000 × 5% × 8/12 2,000
300,000 × 5% × 10/12 12,500
60,000 × 5% × 10/12 2,500
Total 27,000
Example (2): Intangible assets:
An individual purchase a patents for some products as follows:
L.E.24,000 for the patent of product (X) on first of March 2015.
L.E.30,000 for the patent product (Y) on first of July 2015 if you learn that:
He sold the patent related to product (X) to another individual at the end of
June 2016 at L.E. 25,000.
He prepares his accounts on 31st Dec. of every year.
Required:
Compute the tax depreciation that must be considered as deductible cost for
the year 2015 & 2016.
 Solution:
1. Year 2015: L.E.
- Depreciation of cost of patent for product (X) 2,000
= 24,000 × 10% × (10/12)
- Depreciation of cost of patent for product (Y) 1,500
= 30,000 × 10% × (6/12)
Total 3,500
2. Year 2016:
- Depreciation of cost of patent for product (X) 1,200
= 24,000 × 10% × (6/12)
- Depreciation of cost of patent for product (Y) 3,000
= 30,000 × 10% x (12/12)
Total 4,200
Note:
Capital gains related to selling the patent of product (X) = S.P. – B.V., (B.V. =
original cost – A/D), 25,000 – *20,800 = 4,200, must be included in the
revenues that taxable for the year 2016. *(24,000 – 2,000 – 1,200 = 20,800)
Example (3): Computer Hardware, Software:
ABC firm began its operation on January 01, 2015 and its accounting
period ends on December. The firm purchased some computer for
operations as follows (amount in L.E.):
On Nov. 01, 2015 at cost of L.E. 15,000
On April 01, 2016 at cost of L.E. 5,000
On March 01, 2017 at cost of L.E. 3,000
Required:
Compute the taxable depreciation expense deductible through 2015 till
2017.
 Solution:

1. For year 2015: L.E.

Addition of Nov. 01, 2015 15,000
Less : annual depreciation expense 15,000 × 50% ( 7,500 )
depreciation balance 7,500
2. For year 2016:
Addition April 01, 2016 5,000
depreciation balance 12,500
Less : annual April 1, 2016 = 12,500 × 50%
( 6,250 )
depreciation balance
6,250
3. For year 2017:
Addition March 01, 2017 3,000
9,250
Less : annual depreciation expense ( 9,250 )
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Example (4):
A sole proprietorship prepares final accounts on December 31 . The
following transaction took place during 2016:
15 June 2016, computer sold (originally purchased for L.E. 6,000) for 6,500.
10 May 2016, computer purchased for L.E. 10,000
If you learn that the depreciable balance on 01 January 2016 was L.E.
12,000
Required:
Compute the taxable depreciation expense for 2016
 Solution:

Items L.E.

Beginning balance 12,000

Addition – 10 May 2016 10,000
22,000
Less: sale proceeds – 15 June 2016 ( 6,500 )
15,500
Less: annual depreciation : 15,500 × 50% ( 7,750 )

Ending balance 7,750

Example (5):

A sole proprietorship prepares final accounts for the nine - month period
ended Dec.31, 2016. At 01st April 2016 the balance brought forward on the
pool of expenditure was L.E.12,400, on 31st May 2016 the firm acquired
computer costing L.E.7,200 that is included in the pool, and sold computer
for L.E. 5,600
Required:
Compute the taxable depreciation expense for the period ended Dec.31,
2016
 Solution:
Items L.E.
Beginning balance 12,400
Additions – 31 May 2016 7,200
19,600
Less: sale proceeds ( 5,600 )
14,000
Less: tax depreciation : 14000 × 50% × ( 9/12 ) ( 5,250 )
Ending balance 8,750

Note: If the tax period is less than 12 months long, then the depreciation is
scaled down proportionately.