Question

1) A. Six years ago, the Zircon company purchased a long-term asset for $3,875,500. The asset has a 20% CCA rate. Recently, at the end of year six, Zircon sold the asset for 850,000. Given this information, determine the value of the terminal loss or recapture at the end of year six.

B. Zircon Company's effective tax rate is 26%. Calculate the value of the CCA tax shield for the third year (year 3).

Answer 1

Ans.1.A.

Calculation of Carrying Amount as at the end of 6th Year

	Particulars	Amt
	Purchase Price	3,875,500
Less:	Depreciation (3,875,500 x 20%)	775,100
	WDV as at the beginning of 2nd year	3,100,400
Less:	Depreciation (3,100,400 x 20%)	620,080
	WDV as at the beginning of 3rd year	2,480,320
Less:	Depreciation (2,480,320 x 20%)	496,064
	WDV as at the beginning of 4th year	1,984,256
Less:	Depreciation (1,984,256 x 20%)	396,851
	WDV as at the beginning of 5th year	1,587,405
Less:	Depreciation (1,587,405 x 20%)	317,481
	WDV as at the beginning of 6th year	1,269,924
Less:	Depreciation (1,269,924 x 20%)	253,985
	WDV as at the end of 6th year	1,015,939

Therefore Terminal Loss- $1,015,939 - $850,000 = $165,939

Ans.1.B. The value of the CCA tax shield for the third year- $496,064 x 26% = $128,977