Question

Question: Our new computer system cost us $100,000. We will outgrow it in five years. When we sell it, we will probably get only 20% of the purchase price. CCA on the computer will be calculated at a 30% rate (Class 10). Calculate the CCA and UCC values for five years. (Round the final answers to 2 decimal places. Omit $ sign in your response.)

Our new computer system cost us $100,000. We will outgrow it in five years. When we sell it, we will probably get only 20% of the purchase price. CCA on the computer will be calculated at a 30% rate (Class 10). Calculate the CCA and UCC values for five years. (Round the final answers to 2 decimal places. Omit $ sign in your response.)

Answer 1

CCA and UCC values are calculated at a 30% declining rate on the remaining balance each year. After five years, on an initial purchase of $100,000, the CCA deductions total $83,193 and the final UCC value is $16,807. If sold for 20% of the purchase price, tax implications are based on the difference between the sale price and UCC.

Step-by-step explanation:

The student's question pertains to the calculation of Capital Cost Allowance (CCA) and Undepreciated Capital Cost (UCC) for a computer system over five years. The initial cost of the system is $100,000, and it's expected to be sold for 20% of its purchase price after five years. Using the Class 10 CCA rate of 30%, the CCA for the first year is $30,000 (30% of $100,000), so the UCC at the end of first year is $70,000 ($100,000 - $30,000). For the following years, we apply the 30% rate to the UCC of the previous year.

Here's a breakdown of the CCA and UCC values for each year (rounded to two decimal places):

1. Year 1: CCA = $30,000, UCC = $70,000.
2. Year 2: CCA = $21,000 (30% of $70,000), UCC = $49,000 ($70,000 - $21,000).
3. Year 3: CCA = $14,700 (30% of $49,000), UCC = $34,300 ($49,000 - $14,700).
4. Year 4: CCA = $10,290 (30% of $34,300), UCC = $24,010 ($34,300 - $10,290).
5. Year 5: CCA = $7,203 (30% of $24,010), UCC = $16,807 ($24,010 - $7,203).

After five years, the UCC value, which would also be the book value of the computer system, is $16,807. Remember, if the computer system is sold for $20,000 (20% of the purchase price), this amount should be compared against the UCC to determine any recapture or terminal loss for tax purposes.