ACCA Taxation (F6) Practice Exam

When does the gain on the sale of the first asset become deferred when the replacement asset is a depreciating asset?

1. Upon immediate sale of the replacement asset

2. After 10 years from acquisition of replacement asset

3. When the replacement asset is fully depreciated

4. When the replacement asset ceases to be used in trade

The correct answer is: When the replacement asset is fully depreciated

In the context of tax regulations concerning the sale of an asset and its replacement, the gain on the sale of the first asset can be deferred when the replacement asset is a depreciating asset until certain conditions are met. When a taxpayer sells an asset and uses the proceeds to acquire a replacement asset, which is itself depreciating, there may be an option to defer recognizing the gain from the sale of the first asset. This deferral occurs until the replacement asset is fully depreciated. The rationale behind this principle is that as the replacement asset depreciates, its carrying value diminishes, which, in the eyes of tax law, means the taxpayer has not yet realized a gain since the value reduction offsets the gain initially recognized upon the sale of the first asset. Therefore, the obligation to account for the gain on the sale is effectively postponed until the replacement asset has been fully depreciated. Other options do not align with tax deferral principles regarding replacement assets. For instance, immediate sale of the replacement would trigger an immediate recognition of gain, while options discussing specific timeframes or conditions unrelated to the asset's depreciation do not effectively address the deferral of gain until completion of the depreciation process. Consequently, recognizing the gain only after the replacement asset has been