Question

1. A company’s second year operations can be summarized as follows:

Revenues: $110 000

Expenses (except CCA): $65 000

Its capital asset purchases in the first year totalled $100 000, with none in the second year. With a CCA rate of 20 percent and a tax rate of 55 percent, how much income tax did it pay?

Q4 ANSWER:

Second year CCA (5 points):

………………………………………………………………………….

Net income (5 points):

………………………………………………………………………….

Taxes paid (5 points):

………………………………………………………………………….

Answer 1

1. Second Year CCA is $18000

Purchase price of capital asset in the first year = $ 100000

CCA Rate = 20%

CCA is Capital Cost Allowance which is charged on capital cost . It is a way of claiming depreciation on the business assets.It is a capital expense to be used as a deduction before tax is charged.CCA is calculated on the basis of dimnishing balance method. CCA rate for each year is calculated on the dimnished value of the asset.This means that CCA in the second year is calculated on cost of asset less CCA of first year.For the first year only half of CCA rate can be charged and claimed.

Thus,

CCA of first year = capital asset cost * CCA rate *1/2

CCA of first year = $100000 * 20/100 * 1/2 = $10000

CCA for Second year = 20/100 * ($100000-$10000) = $18000

2. Net Income is $12150

Now,

Revenue = $110000, Expenses (except CCA) = $65000, CCA for second year = $18000, Tax rate = 55%

Net income = Revenue - expense - tax paid

Calculation of Net income

Revenue = $110000

less Expenses = ($65000)

less CCA = ($18000)

Taxable Income = $27000

less Tax at 55% = ($14850)

Net Income = $27000 - $14850 = $ 12150

3. Taxes Paid are $14850

Taxable income = Revenue - expense - CCA

= 110000 - 65000-18000

= $27000

Tax paid at 55% rate = $27000*55/100

= $14850