chapter 5 straight line

Question 1

Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.

What was the purchase price of the building and the land, respectively?

1. $340,000; $795,000
2. $440,000; $695,000
3. $425,000; $710,000
4. There is insufficient information given to determine the cost of both the building and the land.

Answer 1

Correct Answer: 2

Option (2) is correct because the purchase price of the building is $440,000 and the purchase price of the land is $695,000. To determine the original purchase price of the building, the original estimated or economic life of 25 years must be used.

Re-arranging this equation, we get:

Purchase price = Cost = (Annual Depreciation Expense × Estimated Economic Life) + Salvage Value
= ($17,000 × 25) + $15,000
= $440,000

The original purchase price of the building was $440,000. Therefore, the cost of the land is $695,000 ($1,135,000 – $440,000). Options (1) and (3) are incorrect because they do not show the correct purchase prices of the building and the land. Option (4) is incorrect because there is sufficient information available to determine these costs.

Question 2

Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.

What is the current book value of the building?

1. $911,000
2. $598,000
3. $1,050,000
4. $355,000

Answer 2

Correct Answer: 4

Option (4) is correct because the current book value of the building is $355,000. To determine the book value, the estimated remaining life of 20 years must be used.

Re-arranging this equation, we get:

Cost = (Annual Depreciation Expense × Estimated Remaining Life) + Salvage Value
= ($17,000 × 20 years) + $15,000
= $355,000

The book value of the warehouse is $355,000. Options (1), (2), and (3) are incorrect because they do not show the current book value of the building.

Question 3

Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.

The building is identified as a Class 1 asset and the rate applied for tax purposes is 4%. How much CCA can the firm claim at the end of the fifth year?

1. $17,600
2. $15,260
3. $8,800
4. $14,948

Answer 3

Correct Answer: 2

Option (2) is correct, as shown in the following table. Options (1), (3), and (4) are incorrect because they do not show the correct CCA claim that can be made at the end of the fifth year.

Year
Remaining depreciable base or UCC

Maximum claim of CCA

CCA claimed

1

$440,000

440,000 × 4% × ½

$8,800

2

$431,200 (440,000−8,800)

431,200 × 4%

$17,248

3

$413,952 (431,200−17,248)

413,952 × 4%

$16,558

4

$397,394 (413,952−16,558)

397,394 × 4%

$15,896

5

$381,498 (397,394−15,896)

381,498 × 4%

$15,260

Question 4

Which of the following statements regarding accounting is TRUE?

1. Net income reported on the income statement is the same as taxable income that is reported on the income tax return.
2. Land is a depreciable asset.
3. Depreciation is not a deductible expense in computing taxable income.
4. The straight line method of depreciation estimates the physical life of the asset.

Answer 4

Correct Answer: 3

Option (3) is correct because it is a true statement.

Option (1) is incorrect because taxable income on the income tax return is derived using capital cost allowance (CCA), whereas depreciation expense is used to derive net income on the income statement; depreciation expense and CCA may differ.

Option (2) is incorrect because land is not a depreciable asset.

Option (4) is incorrect because straight line depreciation estimates the economic life of the asset, meaning how many years the asset will benefit the enterprise, not its physical life.

Question 5

One year ago, Prestige Company Ltd. purchased a new factory at a total cost of $1,500,000 (for the land and the building). The owner, Prescott, estimates that the factory will last for 35 years, at which time the salvage value will be $10,000. The CCA rate applied to the building is 4%. It is now the year end and Prescott must prepare the company’s tax returns. If the income statement has a depreciation expense of $18,750 (using the straight line depreciation method), what is the building’s capital cost allowance for the first year?

1. $18,750
2. $13,325
3. $9,375
4. $19,375

Answer 5

Correct Answer: 2

Option (2) is correct. The calculation for the building’s capital cost allowance for the first year is as follows:

Total cost of building + land = $1,500,000
Life of building = 35 years
Annual depreciation using the straight line method of depreciation = $18,750
Building’s share of cost = 35 × $18,750 + $10,000 = $666,250
Capital Cost Allowance = (0.04 × $666,250) × 0.5 = $13,325

Options (1), (3), and (4) are incorrect because they do not show the correct capital cost allowance for the building in its first year.