Asked by Charles Jackson on May 07, 2024
Verified
SNZ Inc. purchased machinery and equipment in the amount of $30,000 on January 1, 2019. SNZ plans to depreciate the asset straight-line over 20 years with no salvage value. For tax purposes these assets are to be depreciated using a capital cost allowance rate of 20%. The half-year rule applies. SNZ pays tax at a rate of 25%. What is the amount of the temporary difference between straight line depreciation and capital cost allowance on December 31, 2019?
A) Nil
B) $1,500
C) $2,000
D) $3,000
Temporary Difference
Refers to differences between the carrying amount of an asset or liability in the balance sheet and its tax base that will result in taxable or deductible amounts in future periods.
Straight Line Depreciation
A method of allocating the cost of a tangible asset over its useful life in equal annual amounts.
Capital Cost Allowance
A tax deduction in Canada for the depreciation of tangible property.
- Utilize deferred tax concepts in the realm of transactions between affiliated companies.
Verified Answer
For tax purposes, using the capital cost allowance rate of 20%, the first year's depreciation will be (30,000 x 20%) = $6,000. However, the half-year rule applies, which means that only 50% of the CCA rate is used for the first year. Therefore, the tax depreciation for the first year will be (30,000 x 10%) = $3,000.
The temporary difference between straight-line depreciation and tax depreciation for the first year will be ($3,000 - $1,500) = $1,500.
Learning Objectives
- Utilize deferred tax concepts in the realm of transactions between affiliated companies.
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