Company C purchased several pieces of equipment for a total of $ 60,000 on January 1, 2019—its first day of business. The depreciation method is straight-line over 5 years with no residual value. On June 1, 2021, Company C sold one piece of equipment with an original cost of $ 12,000, purchased on January 1, 2019, for proceeds of $ 1,000. On July 1, 2021, Company C sold another piece of equipment with an original cost of $ 9,000, purchased on January 1, 2019, for proceeds of $ 10,000. Company C also purchased new equipment in 2020 for $ 18,000. This is also being depreciated over 5 years on a straight-line basis with no residual value. For simplicity assume Company C takes a full year depreciation in the year acquired and none in the year of disposal. Company C claimed CCA of $ 18,000 in 2019, $ 12,000 in both 2020 and 2021.This is for the assets remaining in the asset pool after disposal and includes the CCA on the addition in 2020. For simplicity ignore the half-year rule. Required Calculate the accounting, or net book value (NBV) and the tax value or undepreciated capital cost (UCC) at the end of 2019, 2020 and 202. Your friend, who works as a financial analyst, tells you she ignores deferred tax amounts when analyzing the true earnings and value of a company. She wants to know if this is right or wrong and why. Please respond to your friend.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Company C purchased several pieces of equipment for a total of $ 60,000 on January 1, 2019—its first day of business. The depreciation method is straight-line over 5 years with no residual value. On June 1, 2021, Company C sold one piece of equipment with an original cost of $ 12,000, purchased on January 1, 2019, for proceeds of $ 1,000. On July 1, 2021, Company C sold another piece of equipment with an original cost of $ 9,000, purchased on January 1, 2019, for proceeds of $ 10,000.
Company C also purchased new equipment in 2020 for $ 18,000. This is also being
For simplicity assume Company C takes a full year depreciation in the year acquired and none in the year of disposal.
Company C claimed CCA of $ 18,000 in 2019, $ 12,000 in both 2020 and 2021.This is for the assets remaining in the asset pool after disposal and includes the CCA on the addition in 2020. For simplicity ignore the half-year rule.
Required
- Calculate the accounting, or net book value (NBV) and the tax value or undepreciated capital cost (UCC) at the end of 2019, 2020 and 202.
- Your friend, who works as a financial analyst, tells you she ignores
deferred tax amounts when analyzing the true earnings and value of a company. She wants to know if this is right or wrong and why. Please respond to your friend.
Step by step
Solved in 3 steps
