1. A digitally controlled lathe was purchased by a small machining company for $
ID: 1096509 • Letter: 1
Question
1. A digitally controlled lathe was purchased by a small machining company for $45,000.00 in early January 2013. It is expected that the lathe will last 9 years and then be worth $6000.00 in the used equipment market. The company accountant has decided to usc a Sum of the Year?s Digits method for internal depreciation; and the government is going to specify that the Capital Cost Allowance for the lathe is 25%. The fiscal year is the calendar year. The corporate tax rate is 35%. (a) What is the internal depreciation charge (expense) that will be made this year (2014)? (b) What is the Capital Cost allowance that will be made on the tax return in 2015? (e) What will the internal book value of the lathe be at the end of 2016? (d) What will be the Undepreciated Capital Cost of the lathe at the end of 2017? (e) lithe machine ?s sold for $10,000 on December 31, 2017, what will be the tax consequences of the sale in 2017?Explanation / Answer
A. Internal Depreication.
With 9 year life. Sum of digits is: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 = 45
2014 is the second year, so choose the second highest digit. 8.
So depreciation is 8/45.
Depreciation amount for 2014 = ($45,000 - $6000)(8/45) = $6933.33
B. Cost of Capital Allowance in 2015.
Since this it the third year in service, (n = 3) the cost of capital allowance will be:
($45,000)(0.25)(1 - 0.25)3-1
($45,000)(0.25)(.75)2= $6328.13
C. What will internal book value be at end of 2016
Internal Book value = Cost - 2013 depreciation - 2014 depreciation - 2015 depreciation - 2016 depreciation
Internal Book Value = $45,000 - ($39,000)(9/45) - ($39,000)(8/45) - ($39,000)(7/45) - ($39,000)(6/45) = $45,000 - $29,000 = $16,000
D. Undepreciated Capital Cost at the end of 2017
2017 is the 5th year.
So the Depreciated Cost in 2017 will be:
Total Depreciated Cost = ($45,000)(0.25)(1 - 0.25)1-1 + ($45,000)(0.25)(1 - 0.25)2-1+ ($45,000)(0.25)(1 - 0.25)3-1 + ($45,000)(0.25)(1 - 0.25)4-1 + ($45,000)(0.25)(1 - 0.25)5-1 = $34321.29
Undepeciated cost will be $45,000 - $34,321.29 = $10,678.71
E. If maching is sold for $10,000 on December 2017 for $10,000 what will be tax cost.
Internal Book value at the end of 2017:
Internal Book Value = $45,000 - ($39,000)(9/45) - ($39,000)(8/45) - ($39,000)(7/45) - ($39,000)(6/45) - ($39,000)(5/45) = $45,000 - $29,000 = $11,666.67
Tax Cost = (Internal book value - Sales) x tax rate
Tax Cost = ($10,000 - $11,666.67) * .34 = -$566.67 Note the negative number means there is not a tax cost but a tax refund.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.