Question

Spectacular Condo Corp. purchased exercise equipment for its recreation room on January 1, 2016 for a cost of $60,000. The equipment is estimated to have a $5,000 residual value and a five-year useful life. It is also estimated that the equipment will be used more than 100,000 times over its five-year life.

As the condominium corporation’s accountant, you have been asked to analyze the following independent amortization scenarios. Please be sure to show your calculations.
A) Assuming that the condominium corporation is calculating amortization for internal purposes, which method would you recommend? Explain why.
B) Explain how your chosen method would be similar or different from the method required for taxation purposes here in Canada.

Answer 1

For internal amortization of exercise equipment, the units of production method is recommended as it ties expense to actual use. For taxation in Canada, the CRA's declining balance (CCA) method would apply.

Step-by-step explanation:

When considering amortization methods for the exercise equipment purchased by Spectacular Condo Corp., it's essential to differentiate between internal accounting purposes and taxation requirements in Canada. Internally, the most appropriate method depends on usage patterns, financial management goals, and how the expenses are planned to be reported. For taxation purposes, the Canadian Revenue Agency (CRA) has specific regulations which might not align with the company's chosen internal accounting approach.

Amortization Method Recommendation

The calculation of amortization for internal purposes should reflect the pattern in which the asset's economic benefits are consumed. If we're assuming the equipment will be used more than 100,000 times over the five-year life, the units of production method could be recommended because it ties the expense recognition to the actual use of the equipment. The formula would be:

• Cost of equipment: $60,000
• Residual Value: $5,000
• Useful life in units: 100,000
• Amortization expense per unit: ($60,000 - $5,000) / 100,000 = $0.55 per use

This method results in higher amortization expenses during periods of higher usage and lower expenses when the equipment is used less, which would be a fair representation for internal reporting.

Amortization for Tax Purposes

For taxation in Canada, the CRA requires a different approach, typically using a declining balance method, commonly known as capital cost allowance (CCA). The rate of CCA is determined by the asset class in which the equipment falls, and it's applied to the remaining unamortized cost (UCC) at the beginning of each year. Unlike the units of production method, CCA doesn't account for actual usage. This could result in slower or faster expense recognition compared to the actual usage pattern of the assets.