Destiny Ltd acquired equipment under a finance lease. The value of the equipment is GHS500,000. The amount is broken into principal repayment of GHS400,000 and interest cost of GHS100,000. The repayment period is five (5) years; Principal (per annum) - GHS80,000; interest cost (per annum) - GHS20,000. The commencement period is January 2020. What will be the capital allowance for the 2022 year of assessment? A. GH¢39,040 B. GH¢39,400 C. GH¢34,900 D. GH¢30,940
Question
Destiny Ltd acquired equipment under a finance lease. The value of the equipment is GHS500,000. The amount is broken into principal repayment of GHS400,000 and interest cost of GHS100,000. The repayment period is five (5) years; Principal (per annum) - GHS80,000; interest cost (per annum) - GHS20,000. The commencement period is January 2020. What will be the capital allowance for the 2022 year of assessment? A. GH¢39,040 B. GH¢39,400 C. GH¢34,900 D. GH¢30,940
Solution
The capital allowance for the 2022 year of assessment can be calculated by determining the annual depreciation expense for the equipment.
To calculate the annual depreciation expense, we need to find the depreciation rate. The depreciation rate can be calculated by dividing the principal repayment by the value of the equipment. In this case, the principal repayment is GHS400,000 and the value of the equipment is GHS500,000.
So, the depreciation rate is GHS400,000 / GHS500,000 = 0.8 or 80%.
Next, we need to calculate the annual depreciation expense by multiplying the depreciation rate by the principal repayment per annum. The principal repayment per annum is GHS80,000.
So, the annual depreciation expense is 80% * GHS80,000 = GHS64,000.
Finally, the capital allowance for the 2022 year of assessment is equal to the annual depreciation expense. Therefore, the correct answer is A. GH¢39,040.
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