An asset with a purchase cost of $112 500 and a CCA rate of 20% has a market value of $7 500 at the end of its 12-year life. Assume this asset is the only asset in its class. Which of the following statements about this situation is correct?
A) There is a recapture of $5 111
B) There is a terminal loss of $6 054
C) There is a recapture of $2 218
D) There is a terminal loss of $3 372

Question

Quizplus · Accepted Answer

The maximum capital cost allowance for an asset in a year is 20% of the asset's purchase cost. Therefore, the CCA claim for the asset in each of its 12 years of service will be ($112 500 x 20%) = $22 500 per year. 
After 12 years, the cumulative CCA claimed will be = (12 x $22 500) = $270 000. 
Since the asset has a market value of $7 500 at the end of its life, the cumulative unclaimed portion of the asset's purchase cost will be ($112 500 - $7 500 - $270 000) = $65 000. 
The terminal loss is calculated as the lesser of the unclaimed portion of the purchase cost and the adjusted cost base (ACB) of the asset. 
The ACB of the asset is calculated as the original purchase cost ($112 500) minus the cumulative CCA claimed ($270 000) = -$157 500, which is negative. Since the ACB cannot be negative, the terminal loss will be equal to the unclaimed portion of the purchase cost, which is $65 000. 
Therefore, the correct answer is D: There is a terminal loss of $3 372, which is equal to the unclaimed portion of the purchase cost ($65 000) multiplied by the tax rate (assume 19.5%) = $3 372.

An Asset with a Purchase Cost of $112 500 and a CCA