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Question 2a

Luna Ltd had the following transactions in shares during the year ended 31 March 2015:

(1) On 29 November 2014, Luna Ltd sold its entire shareholding of £1 ordinary shares in Pluto plc for £53,400. Luna Ltd had originally purchased 16,000 shares in Pluto plc on 14 June 2008 for £36,800. On 22 May 2010, Luna Ltd sold 10,000 of the shares for £46,200.

Retail price indices (RPIs) are as follows:
June 2008            216·8
May 2010             223·6
November 2014   257·0

(2) On 12 February 2015, Luna Ltd’s shareholding in Asteroid plc was taken over by Comet plc. Luna Ltd had originally purchased 10,000 £1 ordinary shares in Asteroid plc, and their indexed cost on 12 February 2015 was £33,000.

Under the terms of the takeover, for each of its £1 ordinary shares in Asteroid plc, Luna Ltd received £6·50 in cash plus one £1 ordinary share in Comet plc. Immediately after the takeover, Comet plc’s £1 ordinary shares were quoted at £4·50.

Required:
(a) Explain how the indexation allowance can be used when a company makes a capital loss, or where the indexation allowance is greater than a company’s unindexed gain. (2 marks)

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