Wasting assets: computation: using the formula T(1)/L
This instruction shows you how to use the T(1)/L formula to calculate how much allowable acquisition cost has been written off. You work through the steps in number order:
- What is the length of time between acquisition and disposal?
- Call this T(1)
- What is the predictable life of the asset from the time of the acquisition?
- Call this L
- Calculate T(1)/L
- What is the allowable acquisition cost?
- Call this E(1)
- What is the predictable scrap or residual value?
- Call this S
- Calculate the expenditure to be wasted over the life of the asset: (E(1) – S).
- How much is the reduction in allowable expenditure up to the date of disposal?
- Calculate (E(1) – S) x T(1)/L
- Call this R(1)
- How much acquisition expenditure is allowable in computing the gain or loss on disposal?
- Calculate (E(1) – R(1))
There is an example at CG76791.
If the residual or scrap value of the asset is increased because of any enhancement expenditure you simply use that adjusted figure S in the above computation. CG76777 tells you how to deal with the enhancement expenditure itself.