Payson Company bought $40,000 worth of office equipment at the beginning of Year 1. This equipment has a useful life of eight years and a salvage value at the end of its useful life of $4,000. This equipment is in Class 7 with capital cost allowance (CCA) rate of 15%. The income tax rate is 40%.
-What is the maximum amount of CCA that the company can deduct for tax purposes for Year 1?

Question

Quizplus · Accepted Answer

The maximum amount of CCA that the company can deduct for tax purposes for Year 1 can be calculated using the declining balance method. 
First, calculate the CCA rate for Year 1: 15% x 2/3 = 10%
Next, calculate the maximum CCA deduction: $40,000 x 10% = $4,000
However, since the maximum CCA deduction cannot exceed the undepreciated capital cost (UCC) at the end of the year, we need to subtract the CCA deduction from the UCC at the beginning of the year. 
UCC at beginning of Year 1 = $40,000
CCA deduction for Year 1 = $4,000
UCC at end of Year 1 = $40,000 - $4,000 = $36,000
Therefore, the maximum amount of CCA that the company can deduct for tax purposes for Year 1 is $3,600 (10% x $36,000).
Since the answer choices do not include $3,600, the closest option is B, $3,000.

Payson Company Bought $40,000 Worth of Office Equipment at the Beginning