Chapter 2 861178304.
xls
Atrill/Hurley
Financial Management for Decision Makers
Canadian Edition
Chapter 2
General Excel Template
Topic: Capital Cost Allowance (CCA)
Introduction:
When companies claim an amortization expense on their income tax return, they must
do so following the methodology and rates set out by the government in the Income
Tax Act. The process of calculating amortization amounts for the purposes of claiming
them as an income tax expense on a company income tax return is referred to as
capital cost allowance (CCA).
Scenario:
XYZ Corporation, a Canadian publishing company, has just purchased 10 printing
presses for $15,000 each. The company plans to use the equipment for 10 years, after
which all the printing presses XYZ Corporation owns will be sold. The equipment is
acquired and installed on January 1, Year 1. At the beginning of Year 5, the company
sells one of the presses for $6,000. At the beginning of Year 8, the company buys an
additional press for $18,000.
Input Area:
Asset class 8 ▪ determined by Income Tax Act
CCA rate 20.00% ▪ determined by Income Tax Act
Initial value of
asset pool $150,000.00 ▪ the total of 10 presses costing $15,000 each
Years of use 10
Sale price of
press in Year 5 $6,000.00
Purchase price
of press in Year
8 $18,000.00
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Output Area:
Year Opening UCC CCA Closing UCC
1 $150,000.00 $15,000.00 $135,000.00
2 $135,000.00 $27,000.00 $108,000.00
3 $108,000.00 $21,600.00 $86,400.00
4 $86,400.00 $17,280.00 $69,120.00
5 $63,120.00 $12,624.00 $50,496.00
6 $50,496.00 $10,099.20 $40,396.80
7 $40,396.80 $8,079.36 $32,317.44
8 $50,317.44 $8,263.49 $42,053.95
9 $42,053.95 $8,410.79 $33,643.16
10 $33,643.16 $6,728.63 $26,914.53
Cell reference Excel formula Comment
B25 =B18 The original value of the asset class (or pool) is
the total undepreciated capital cost (UCC) of all
the assets.
C25 =B25*0.5*B17 In the first year of installed operation, the CCA
can only be based on half of the total value of the
asset class. This is the half-year rule.
D25 =B25-C25
The closing value of the asset class in any given
year is the difference between the opening UCC
of the asset class and the amount claimed as
CCA that year.
B29 =D28-B20 When an asset from a class is sold, the value of
the asset class is reduced by the sale price of the
asset (or the original value of the asset—
whichever is less).
C29 =B29*B17 The reduction in the UCC of the asset class in
turn reduces the amount of CCA that can be
generated by the class.
B32 =D31+B21 When an asset is purchased and added to an
existing asset class, the UCC of the asset class
is increased by the value of the asset.
C32 =(D31+(0.5*B21))*B17 Whenever an additional asset is added to an
existing asset class, the half-year rule applies to
the value of the additional asset when calculating
the CCA of the class.
D34 =B34-C34 The future CCA amounts continue the declining
balance calculations of the remaining UCC to
infinity.
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Tax implications of terminating the asset pool:
Suppose that at the end of Year 10, all the remaining printing presses owned by XYZ
Corporation are sold. Depending on the sales price of the assets, different tax
implications can be encountered:
(a) Suppose the remaining assets are sold for: $26,914.53
Since the proceeds from the sale exactly match the closing UCC balance, UCC is
reduced to zero, and there are no tax implications.
Year Opening UCC CCA Closing UCC Comments
10 $33,643.16 $6,728.63 $26,914.53
-$26,914.53 Proceeds from
11 sale
$0.00 Adjusted opening
11 balance
11 $0.00 $0.00 $0.00
(b) Suppose the remaining assets are sold for: $35,000.00
Since the proceeds from the sale exceed the closing UCC balance, there is a credit
balance in UCC. This is referred to as a CCA recapture.
Year Opening UCC CCA Closing UCC Comments
10 $33,643.16 $6,728.63 $26,914.53
-$35,000.00 Proceeds from
11 sale
-$8,085.47 Adjusted opening
11 balance
11 -$8,085.47 CCA recapture
11 $0.00 $0.00 $0.00
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(c) Suppose the remaining assets are sold for: $20,000.00
Since the proceeds from the sale are less than the closing UCC balance, there is a
balance of UCC remaining. This is referred to as a terminal loss.
Year Opening UCC CCA Closing UCC Comments
10 $33,643.16 $6,728.63 $26,914.53
-$20,000.00 Proceeds from
11 sale
$6,914.53 Adjusted opening
11 balance
11 $6,914.53 Terminal loss
11 $0.00 $0.00 $0.00
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