ACCA Taxation (F6) Practice Exam

What is the consequence of disposing of an asset in the final accounting period?

1. It triggers a full capital allowance claim

2. It results in a balancing allowance or charge

3. It leads to a permanent loss of that asset

4. It has no impact on tax calculations

The correct answer is: It results in a balancing allowance or charge

Disposing of an asset in the final accounting period generally results in a balancing allowance or charge. This is because, at the end of the asset's useful life or when it is sold, there is a need to adjust for the tax implications of that disposal. When an asset is disposed of, the tax system looks to reconcile the initial capital allowances claimed against the actual economic value received from the disposal. If the proceeds from the sale of the asset are less than its tax written down value, a balancing allowance is granted, which can be claimed as a deduction against taxable income. Conversely, if the proceeds exceed the tax written down value, a balancing charge arises, increasing the taxable income. This balancing mechanism ensures that taxpayers are not unfairly advantaged or disadvantaged by the timing of their disposals and reflects the true economic impact of the asset's disposal on the business's financial position. Therefore, recognizing the consequence as a balancing allowance or charge provides an accurate representation of the tax treatment associated with the disposal of an asset in the final accounting period.