Wasting assets: computation: allowable acquisition cost
CG76700 tells you that a wasting asset is likely to become less valuable over its predictable life. At the end of that life, it has only a residual or scrap value.
Normally you allow the full acquisition cost of the asset in calculating any gain arising on its disposal. When, however, you are dealing with a wasting asset, you have to make certain assumptions. Depending on how much of the predictable life of the asset, see CG76700, has elapsed between its acquisition and disposal, the amount of allowable acquisition cost is reduced.
In computing the gain arising on the disposal of a wasting asset, you:
- reduce the allowable acquisition cost by the residual or scrap value
- write off the balance over the predictable life of the asset
- only allow any balance which has not been written off by the date of disposal.
In practice, you calculate how much allowable acquisition cost has been written off, by using a simple formula. This is called T(1)/L and CG76775 shows you how to use it.