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 will be able to deduct for tax purposes for Year 2?

Question

Quizplus · Accepted Answer

The maximum amount of CCA that the company will be able to deduct for tax purposes for Year 2 can be calculated as follows:
Undepreciated Capital Cost (UCC) at the beginning of Year 2 = $40,000 - CCA claimed for Year 1
UCC at the beginning of Year 2 = $40,000 - (0.15 x $40,000) = $34,000
Maximum CCA for Year 2 = CCA rate x UCC at the beginning of Year 2
Maximum CCA for Year 2 = 0.15 x $34,000 = $5,100
Therefore, the answer is B) $5,100.

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