Homework Answers
Answer
A) Depreciation under straight line method=(Original cost of asset-Salvage value)/Useful life of asset
Original cost=$1200000
Salvage value=$1200000*10%=$120000
Useful life of asset=10 years
Depreciation under straight line method=(1200000-120000)/10=108000
It is same for all the 10 years
Tax to be paid
Annual income before tax & depreciation 500000
Less:Depreciation 108000
Annual before tax income 392000
Tax@25% 98000
Hence,tax to be paid for 5 years=98000*5=$490000
B) CCA Depreciation
CCA class 43 rate=30%
Depreciation from year 1 to year 5
Year 1
Original cost=1200000
CCA (after applying half year rule(1200000*30%*1/2)=180000
Value for next year=1200000-180000=1020000
Year 2
CCA=1020000*30%=306000
Value for next year=1020000-306000=714000
Year 3
CCA=714000*30%=214200
Value for next year=714000-214200=499800
Year 4
CCA=499800*30%=149940
Value for next year=499800-149940=349860
Year 5
CCA=349860*30%=104958
Value for next year=349860-104958=244902
Year "Income before tax
& depreciation" CCA depreciation Income before tax Tax @25%
1 500000 180000 320000 80000
2 500000 306000 194000 48500
3 500000 214200 285800 71450
4 500000 149940 350060 87515
5 500000 104958 395042 98760.50
386225.5
Tax paid cumulatively for 5 years=386225.50
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