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8-1

Chapter 8 Depreciation
Book Depreciation Methods

8.1 $45,000 2 (45,000 5,000)/4 = $25,000

8.2 d = (1/4) 2 = 0.5, D2 = 45,000(1 0.5) 0.5 = $11,250

8.3 SOYD = 1 + 2 + 3 + 4 = 10; D1 = (4/10) (45,000 5,000) = $16,000; D2 =


(3/10) (40,000) = $12,000; B2 = 45,000 16,000 12,000 = $17,000

CCA or UCC Calculation

8.4 d = 0.2; Un = 30,000 (1 0.2/2) (1 0.2)n 1 = 11,059; (n 1) ln(0.8) =


ln(0.4096); n = 5 years

Economic Depreciation
8.5 economic depreciation = $5,000 $2,300 = $2,700

Cost Basis
8.6 Cost basis for flexible manufacturing cells:

Flexible manufacturing cells ($500,000 3) $1,500,000


Freight charges 25,000
Handling fee 12,000
Site preparation costs 35,000
Start-up and testing costs 18,000
Special wiring and material costs 1,500
Cost basis $1,591,500

(Note: Start-up and testing costs = $15 40 6 5 = $18,000)

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8-2

CCA or UCC Calculation


8.7 CCA Class 1 (d = 4%)

Year CCA UCC


0 $375,000
1 $7,500 367,500
2 14,700 352,800
3 14,112 338,688
4 13,548 325,140
5 13,005 312,135

Cost Basis
8.8 Trade-in allowance:

Old drill press (book value) $25,000


Less: Trade-in allowance 20,000
Unrecognized loss ($5,000)
Cost of new drill 95,000
Plus: Unrecognized loss on trade-in 5,000
Cost basis of new drill $100,000

Comments: If the old drill was sold on the market (instead of trade-in), there
would be no unrecognized loss. In that situation, the cost basis for the new drill
will be just $95,000.

8.9 Trade-in allowance:

Old lift-truck (book value) $6,000


Less: Trade-in allowance 10,000
Unrecognized gains ($4,000)
Cost of new lift-truck 35,000
Less: Unrecognized gains on trade-in 4,000
Cost basis of new truck $31,000

Comments: If the old truck was sold on the market (instead of trade-in), there
would be no unrecognized gains. In that situation, the cost basis for the new
truck will be just $35,000.

Book Depreciation Methods

8.10 d = (1/8) 2.0 = 0.25; D3 = 0.25 150,000 (1 0.25)2 = $21,094

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8-3

*
8.11

Given: = $60,000, S = $5,000, = 8 years

DDB SL from Yr Depn With BV With


Annual Switching to Switching to
n Depn Book Value n to 8 SL SL
1 $15,000 $45,000 $6,875 $15,000 $45,000
2 $11,250 $33,750 $5,714 $11,250 $33,750
3 $8,438 $25,313 $4,792 $8,438 $25,313
4 $6,328 $18,984 $4,063 $6,328 $18,984
5 $4,746 $14,238 $3,496 $4,746 $14,238
6 $3,560 $10,679 $3,079 $3,560 $10,679
7 $2,670 $8,009 $2,839 $2,839 $7,839
8 $2,002 $6,007 $3,009 $2,839 $5,000

5(5 1)
8.12 (a) SOYD 15
2

(b) D1 = ($12,000 $2,000) (5/15) = $3,333

(c) The depreciation amounts in the first four years are (5/15), (4/15), (3/15),
and (2/15) respectively, for a total of (14/15). Therefore the total depreciation
for these four years is $10,000*(14/15) = $9,333. Therefore, B4 = $12,000-
$9,333 = $2,667.

Units-of-Production Method

8.13 Allowed depreciation amount

D = ($0.32)(55,000) = $17,600

$60, 000 $8, 000


8.14 D5,000hours (5, 000) $5, 200
50, 000

CCA or UCC Calculation


8.15
(a) Capital cost: $180,000 + $35,000 = $215,000
*
An asterisk next to a problem number indicates that the solution is available to students
on the Companion Website.

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8-4

Year CCA UCC


0 $215,000
1 $32,250 182,750
2 54,825 127,925
3 38,378 89,548
4 26,864 62,683
5 18,805 43,878
6 13,163 30,715
7 9,214 21,500
8 6,450 15,050
9 4,515 10,535
10 3,161 7,375
11 2,212 5,162
12 1,549 3,614

MACRS Depreciation
*
8.16

Given: I = $20,000, tax depreciation method = six-year MACRS property class


with half-year convention

200% DB SL MACRS
n Bn1 Dn life Dn Dn
1 $20,000 $3,333 $3,333
2 $16,667 $5,556 5.5 $3,030 $5,556
3 $11,111 $3,704 4.5 $2,469 $3,704
4 $7,407 $2,649 3.5 $2,116 $2,649
5 $4,938 $1,646 2.5 $1,975 $1,975
6 $3,292 $549 1.5 $1,975 $1,975
7 0.5 $988

: Optimal time to switch


CCA or UCC Calculation
*
8.17

For Class 43, d = 30%

Year CCA UCC


0 $68,000
1 $10,200 57,800
2 17,340 40,460
3 12,138 28,322
4 8,497 19,825

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8-5

5 5,948 13,878

8.18 This non-systems software belongs in Class 12 (see Table 8.1) with d = 100%.
It is subject to the 50% rule since it is NOT exempt (see Section 8.4.4).
Year CCA UCC
0 $10,000
1 $5,000 5,000
2 5,000 0
3 0 0
4 0 0

Cost Basis

8.19
Total property value with the warehouse:

Land Building
Original cost $65,000 $35,000
Adjustments to basis 35,000
Add: New warehouse 50,000
Demolition expense 5,000
Subtract: Building loss (35,000)
Adjusted cost basis $100,000 $55,000

Total value = $100,000 + $5,000 + $50,000 = $155,000


Note that the old house that was demolished has no value. This loss may be
deductible for tax purposes, but this should not be added to the cost basis of the
new asset for book depreciation. In general, the propertys entire basis is
allocated to the land only, if the company intends to demolish the building
when they acquire the property for business use. Then the cost basis is
increased by the net cost of demolition. (The demolition can be treated as a site
preparation expense.)

Cost basis for book depreciation:

Cost basis = $5,000 + $50,000 = $55,000

Book Depreciation Methods


8.20 Depreciation allowances and book values: (a) depreciation rate = 1/N = 1/5 for
SL, (b) depreciation rate = 1/5 =20% for DB, (c) SOYD =15

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8-6

SL DB SOYD
n Dn Bn Dn Bn Dn Bn
1 $18,000 $82,000 $20,000 $80,000 $30,000 $70,000
2 18,000 64,000 16,000 64,000 24,000 46,000
3 18,000 46,000 12,800 51,200 18,000 28,000
4 18,000 28,000 10,240 40,960 12,000 16,000
5 18,000 10,000 8,192 32,768 6,000 10,000
*
8.21

d = 1/7; SL calculated from period n to N, switch to straight-line when D(SL) >


D(DB).

n D(DB) D(SL)
0 $30,000
1 4,286* $3,143 25,714
2 3,673* 2,952 22,041
3 3,149* 2,808 18,892
4 2,699 2,723* 16,169
5 2,310 2,723* 13,446
6 1,921 2,723* 10,723
7 1,532 2,723* 8,000
*amount claimed in year n

8.22 Given: = $80,000, S = $22,000, = 6 years

(a) D1 = $26,667, D2 = $17,778, D3 = $11,852

(b) DDB switching to SL

n Dn Bn
1 $26,667 $53,333
2 17,778 35,556
3 11,852 23,704
4 1, 704 22,000
5 0 22,000
6 0 22,000

Comments: If the regular DDB deduction is taken during the fourth year, B4
would be less than the salvage value. Therefore, it is necessary to adjust D4.
The number in the box represents the adjusted value.

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8-7

*
8.23

Given: = $20,000, = 5 years, S = $3,000

n SL DDB SOYD
1 $3,400 $8,000 $5,667
2 3,400 4,800 4,533
3 3,400 2,880 3,400
4 3,400 1,320 2,267
5 3,400 0 1,133

8.24 Given: = $58,000, S = $8,000, N = 12 years

($58, 000 $8, 000)


(a) D $4,167
12

(b) D3 = $6,713

(c) D2 = $7,051

Units-of-Production Method
8.25
Truck A:

25, 000
D ($50, 000 $5, 000) $5, 625
200, 000

Truck :

12, 000
D ($25, 000 $2,500) $2, 250
120, 000

Truck C:

15, 000
D ($18,500 $1,500) $2,550
100, 000

Truck D:

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8-8

20, 000
D ($35, 600 $3,500) $3, 210
200, 000

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8-9

CCA or UCC Calculation


*
8.26
Given: = $32,000, S = $5,000, = 8 years

n D(book) CCA
1 $3,375 $4,800
2 3,375 8,160
3 3,375 5,712
4 3,375 3,998
5 3,375 2,799
6 3,375 1,959
7 3,375 1,371
8 3,375 960

8.27 CCA Class 1 for buildings (d = 4%); 50% rule applies

(a) CCA1 = (0.04/2) 120,000 = $2,400 (Note: The land is not depreciable.)

(b) UCC4 = 120,000 (1 0.04/2)(1 0.04)4 1 = $104,045

8.28 The spindle machine became available for use on the second taxation year
after the date the property was acquired, which is 2008. Since the spindle
machine became available for use more than 358 days after acquisition, it is
exempt from the 50% rule. Class 43: d = 30%

n CCAn UCCn
2006 $34,000
2008 $10,200 23,800
2009 7,140 16,660
2010 4,998 11,662
2011 3,499 8,163
2012 2,449 5,714

8.29 For Book depreciation: d = 1/6; D6 = 7,500(1 1/6)6 = $2,512


For Tax depreciation: d = 20%, 50% rule applies

CCA6 = 7,500 0.20 (1 0.2/2)(1 0.2)4 = $553


UCC6 = 7,500 (1 0.2/2)(1 0.2)5 = $2,219

8.30
Book depreciation:

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8-10

Asset Type
Year Lathe Truck Building Photocopier
1 $7,500 $2,530 $14,000 $13,333
2 6,250 2,875 14,000 10,666

(a) Tax depreciation: All four assets are subject to 50% rule

Asset Type
Year Lathe Truck Building Photocopier
1 $6,750 $3,750 $16,000 $4,000
2 11,475 6,375 31,360 7,200

(b) Book depreciation for lathe:

n Dn n Dn
1 $7,500 7 $2,512
2 6,250 8 2,093
3 5,208 9 1,866
4 4,340 10 1,866
5 3,617 11 1,866
6 3,014 12 1,866
*
8.31
Type of Asset I II III IV
Dep. methods SL DDB SOYD UP
End of year 7 4 3 3
Initial cost ($) 10,000 18,000 90, 000 30,000
Salvage value ($) 2,000 2,000 7,000 0
Book value ($) 3,000 2,320 23, 600 15, 000
Depreciable life 8 years 5 years 5 years 90,000 km
Dep. amount ($) 1, 000 1,555 16,600 5, 000
Accum. Dep. (S) 7, 000 15,680 66,400 15, 000

8.32
Given: = $147,000, = 10 years, S = $27,000, units produced = 250,000,
working hours = 30,000 hrs

(a) Straight-Line

$147, 000 $27, 000


D2009 $12, 000
10

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8-11

(b) Units-of-Production Method

23, 450
D2009 ($147, 000 $27, 000) $11, 256
250, 000

(c) Working Hours

2, 450
D2009 ($120, 000) $9,800
30, 000

(d) Sum-Of-the-Years-Digits

10
D2009 ($147, 000 $27, 000) $21,818
55

(e) Declining Balance

1
D2009 ($147, 000) $14, 700
10

(f) Double Declining Balance

2
D2009 ($147, 000) $29, 400
10

8.33 All of these assets are subject to the 50% rule. CCA may be claimed starting in
the year when each asset becomes available for use.

Car Arc Welder Freezer


Capital cost $15,000 $12,000 $8,000
Available-for-use 2005 2005 2006
CCA Class 10 43 8
DB rate d = 30% d = 30% d = 20%
2005 $2,250 $1,800
2006 3,825 3,060 $800
2007 2,678 2,142 1,440
2008 1,874 1,499 1,152
2009 1,312 1,050 922

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8-12

8.34 Class 16: CCA rate = 40%; 50% rule applies

CCA - Schedule 8 Column Labels


2 3 5 6 7 8 12 13
UUC UCC 50% Reduced UCC
Yr Start Acquisitions Dispositions (unreduced) rule UCC CCA End
1 $0 $296,000 $0 $296,000 $148,000 $148,000 $59,200 $236,800
2 $236,800 $54,000 $0 $290,800 $27,000 $263,800 $105,520 $185,280
3 $185,280 $142,000 $58,000 $269,280 $42,000 $227,280 $90,912 $178,368
4 $178,368 $0 $32,000 $146,368 $0 $146,368 $58,547 $87,821

8.35
Depreciation Method
A SOYD
DDB
C CCA
D DDB with conversion to SL

MACRS Depreciation
8.36 Let P denote the cost basis for the equipment.
B3 P ( D1 D2 D3 ) P
P (0.1428 0.2449 0.1749) P
P 0.5626 P
0.4374($145, 000)
$63, 423
Revisions to Depreciable Property
8.37 Referring to Example 8.11, we must calculate the prorated portion, which is the
lesser of:

(a) one fifth of the capital cost: $22,000/5 = $4,400

or (b) the number, N, of 12-month periods from the start of the year when the
improvement was made to the end of the original lease = 7 (Note: Lease
renewal is not applicable.)

(Capital cost)/N $22,000/7 = $3,142

The lesser of these is $3,143, with only half claimable in the first year. The
allowable CCA for the first three years after the leasehold improvement:

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8-13

CCA1 = $1,571 CCA2 = $3,142 CCA3 = $3,142

8.38
(a) D = ($1,200,000 $400,000)/ 25 = $32,000/year

(b) B = $400,000 + $125,000 = $525,000

(c) Original estimate of depreciable life: ($1,200,000 $0)/N = $32,000

= 37.5 years

Remaining years after repairs = (37.5 25) + 10 = 22.5 years

Depreciation over the coming year: D = $525,000/22.5 = $23,333

8.39
(a) Book depreciation amount for 2011:

B2009 $140,000 3($14,000)


$98,000
revised depreciation basis $98, 000 $25, 000
$123, 000
revised useful life 12 years
D2011 $123, 000 /12 $10, 250

(b) Class 43: CCA rate = 30%

Moulding Machine Overhaul


Year CCA UCC CCA UCC Total CCA
$140,000
2006 $21,000 119,000 $21,000
2007 35,700 83,300 35,700
2008 24,990 58,310 $25,000 24,990
2009 17,493 40,817 $3,750 21,250 21,243
2010 12,245 28,572 6,375 14,875 18,620
2011 8,572 20,000 4,463 10,413 13,034

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8-14

Short Case Studies


ST 8.1

CCA Schedule 8 Column Labels


2 3 5 6 7 8 9 12 13
YEAR 1 UUC UCC 50% Reduced CCA UCC
Class Start Acquisitions Dispositions (unreduced) rule UCC Rate CCA End
8 $0 $7,000 $0 $7,000 $3,500 $3,500 20% $700 $6,300
10 $0 $13,000 $0 $13,000 $6,500 $6,500 30% $1,950 $11,050
12 $0 $3,200 $0 $3,200 $1,600 $1,600 100% $1,600 $1,600
50 $0 $3,500 $0 $3,500 $1,750 $1,750 55% $963 $2,538
TOTAL = $5,213

YEAR 2
8 $6,300 $0 $0 $6,300 $0 $6,300 20% $1,260 $5,040
10 $11,050 $0 $0 $11,050 $0 $11,050 30% $3,315 $7,735
12 $1,600 $1,000 $0 $2,600 $500 $2,100 100% $2,100 $500
50 $2,538 $4,000 $0 $6,538 $2,000 $4,538 55% $2,496 $4,042
TOTAL = $9,171

YEAR 3
8 $5,040 $2,500 $1,000 $6,540 $750 $5,790 20% $1,158 $5,382
10 $7,735 $20,000 $6,000 $21,735 $7,000 $14,735 30% $4,421 $17,315
12 $500 $0 $0 $500 $0 $500 100% $500 $0
50 $4,042 $0 $0 $4,042 $0 $4,042 55% $2,223 $1,819
TOTAL = $8,302

YEAR 4
8 $5,382 $0 $0 $5,382 $0 $5,382 20% $1,076 $4,306
10 $17,315 $0 $0 $17,315 $0 $17,315 30% $5,194 $12,120
12 $0 $0 $0 $0 $0 $0 100% $0 $0
50 $1,819 $2,000 $500 $3,319 $750 $2,569 55% $1,413 $1,906
TOTAL = $7,684

ST 8.2
(a) Book depreciation schedule: SL depreciation rate = ($79,500 $4,500)/12
= $6,250 each year (including 2008)

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8-15

(b) Cost basis = $79,500; Class 43 CCA rate = 30%

n CCAn UCCn
2005 $11,925 $67,575
2006 20,273 47,303
2007 14,191 33,112
2008 9,934 23,178

Comments: The accessories costing $2,000 that were incurred in 2007 do


not change the depreciation schedule. This type of regular maintenance gets
treated as current expenses.

ST 8.3 Given: P = $63,000 + $2,000 = $65,000, N = 10 years, and S = $4,000

Book depreciation expense for 2004:

$65, 000 $4, 000


D2004 $6,100
10

Year Dn Bn
2004 $6,100 $58,900
2005 $6,100 $52,800

new depreciation basis $52,800 $6, 000 $58,800


remaining useful life 11years
salvage value $4, 000

Book depreciation expense for 2006:

$58,800 $4, 000


D2006 $4,982
11
B2006 $58,800 $4,982 $53,818
new depreciation basis $53,818 $3, 000 $56,818
remaining useful life 10 years
salvage value $6, 000

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8-16

Book depreciation expense for 2007:

$56,818 $6, 000


D2007 $5, 082
10
B2007 $56,818 $5, 082 $51, 736

Comments: Whenever any repairs or improvements increase the value of


the asset (increased salvage value) or extend the life of the asset, these costs
should be a part of the depreciation basis.

ST 8.4
(a) Book depreciation methods:

Straight-line method:

Cumulative
n Dn Bn Dn
1 $12,000 $53,000 $12,000
2 12,000 41,000 24,000
3 12,000 29,000 36,000
4 12,000 17,000 48,000
5 12,000 5,000 60,000

DDB method:

Cumulative
n Dn Bn Dn
1 $26,000 $39,000 $26,000
2 15,600 23,400 41,600
3 9,360 14,040 50,960
4 5,616 8,424 56,576
5 3,424 5,000 60,000

SOYD method:

Cumulative
n Dn Bn Dn
1 $20,000 $45,000 $20,000
2 16,000 29,000 36,000
3 12,000 17,000 48,000
4 8,000 9,000 56,000
5 4,000 5,000 60,000

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8-17

(b) Class 43 CCA rate = 30%

n CCAn UCCn
0 $65,000
1 $9,750 55,250
2 16,575 38,675
3 11,603 27,073
4 8,122 18,951
5 5,685 13,266

(c) Since we don't have the market value after three years, we may assume
that the salvage value equals the trade-in value.

CCA4 = (UCC3 sales + purchases/2)*d


= (27,073 10,000 + 82,000/2)*0.3
= 17,422

UCC4 = UCC3 CCA4 = 27,073 17,422 = $9,651

ST 8.5 No solution provided; see Canada Revenue Agency website


www.cra-arc.gc.ca for Canada Customs and Revenue Agency
Interpretation Bulletins.

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