Question

XYZ Company purchases computer software that is not systems software during the current year. The acquisition cost is​ $5,000, and the assets are Class 12 assets with no special circumstances. Using only this​ information, if XYZ takes the maximum allowable CCA for the​ year, what is the UCC on Class 12 assets at the beginning of the following​ year?

A. ​$2,500
B. ​$3,500
C. ​$0
D. ​$4,000

Answer 1

The maximum CCA that XYZ Company can claim on the $5,000 software, a Class 12 asset, for the year is $2,500 (50% of the acquisition cost). Therefore, the UCC at the beginning of the following year is also $2,500.

Step-by-step explanation:

The question pertains to the calculation of the capital cost allowance (CCA) on computer software, which is a Class 12 asset for tax purposes. The calculation of the CCA for the year and consequently the undepreciated capital cost (UCC) for the beginning of the following year is as follows:

The maximum CCA rate for Class 12 assets is typically 100%, but for the year of acquisition, only half of the cost can be claimed (the half-year rule). Therefore, the maximum CCA XYZ Company can claim for the year on the $5,000 software purchase is 50% of $5,000, which is $2,500.

Subtracting the CCA from the initial cost gives the UCC for the beginning of the next year: $5,000 - $2,500 = $2,500.

So, the correct answer to the student's question is A. $2,500, which is the UCC on Class 12 assets at the beginning of the following year after taking the maximum allowable CCA for the year.