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Lokesh Gujral
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Asked: 2023-09-19T09:22:20+05:30 In:

ACB – Replacement Project

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ACB – Replacement Project

The above sum (Class 12 CW Q1) is based on block concept. In the question, it is expressly stated that there are several machines in the block. Taking that into consideration, I understand that there will be no capital gain/loss while calculating initial outflow because the block didn’t get exhausted.

Applying the same logic, if there are several machines in the block, we should not consider capital gain/loss while calculating terminal flow also because the block won’t get exhausted if 1 machine is sold out of the several machines present in the block.

In class, we’ve considered capital gain/loss while calculating terminal flow but ICAI, in it’s solution hasn’t considered capital gain/loss while calculating terminal flow.

Anybody got an opinion on this?

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    1 Answer

    1. aks06041984
      Advanced

      Here are a few considerations for including or excluding capital gain/loss in the terminal flow:

      1. Treatment of Block Concept: When there are several machines in a block and one machine is sold, it’s common to not consider capital gain/loss in the terminal flow. This is because the block still has remaining machines, and the block is not getting exhausted. This approach is in line with the concept of block depreciation.
      2. Consistency: It’s important to maintain consistency in your analysis. If you have not considered capital gain/loss in the initial outflow due to the block concept, it makes sense to apply the same logic to the terminal flow to maintain consistency in your analysis.
      3. Practicality: Including capital gain/loss in the terminal flow can add complexity to the analysis. In some cases, it might be difficult to estimate the exact capital gain/loss, especially if there are multiple machines in the block with different purchase prices and accumulated depreciation.
      4. Tax Implications: The treatment of capital gain/loss can also be influenced by tax regulations. If there are tax implications associated with capital gains or losses on the sale of assets, those should be considered in the analysis.

      Ultimately, whether or not to include capital gain/loss in the terminal flow should be a conscious decision made by the analyst or organization conducting the analysis. As long as the approach is consistent and justifiable, it can be considered a reasonable choice.

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