Financial Analysis Tools 3 – 14
31. Which of the following statements is true?
a) The CCA rate is the same for most asset classes, with the exception of land.
b) When an asset is sold, the salvage value is added to the aggregate value of the
asset class.
c) If no assets are bought or sold, the CCA amount will be constant over time.
d) In the year of the acquisition, the CCA claim is based on half the cost of the asset.
32. What does the UCC represent?
a) The amount of depreciation that should be expensed in the income statement.
b) The residual amount that should be depreciated over future years.
c) The salvage value of the asset.
d) The capital expenditure value that is reported on the cash flow statement.
33. Confu Corp’s income statement for the year ended 2015 shows depreciation
expense of $25,000. The total amount of CCA claimed in 2015 _____________
$25,000
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a) must equal
b) cannot equal
c) need not equal
d) must be less than
34. On June 1 of year 1, XYZ bought office equipment for $50,000. The equipment falls
into class 8 with a CCA rate of 20%. Assuming that the equipment is the only asset in
that class, what is the CCA that XYZ can claim for the fiscal year at the end of year 1?
a) $4,167
b) $5,833
c) $5,000
d) $10,000
35. On March 15 of year 1 XYZ bought a machine for $50,000. The machine is in class
43 with a CCA rate of 30%. Assuming that the machine is the only asset in that class,
what is the CCA that XYZ can claim for the fiscal year ended at the end of year 1?
a) $7,500
b) $11,250
c) $12,750
d) $15,000
36. At the beginning of year 1, XYZ bought a machine for $50,000. The machine is in
class 43 with a CCA rate of 30%. Assuming that the machine is the only asset in the
class, what is the CCA that XYZ can claim for the fiscal year ended at the end of year
2?
a) $7,500
b) $11,250
c) $12,750
d) $15,000
37. At the beginning of year 1, XYZ bought a machine for $50,000. The machine is in
class 43 with a CCA rate of 30%. Assuming that the machine is the only asset in the
class, what is the UCC (undepreciated capital cost) for the machine class after CCA is
claimed at the end of year 2?
a) $27,000
b) $27,500
c) $29,750
d) $50,000
38. At the beginning of year 1, LMOT Company had the following UCC balances:
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Class 43, CCA rate = 30%, UCC = $25,000
Class 8, CCA rate = 20%, UCC = $10,000
During Year 1, LMOT neither bought nor sold any assets. The total CCA that LMOT can
claim in Year 1 is:
a) $4,750
b) $7,000
c) $9,500
d) $10,500
39. The sale of depreciable assets cannot result in ____________.
a) capital gains
b) capital losses
c) CCA recapture
d) terminal losses
40. A CCA recapture or terminal loss can arise when
I. the CCA asset class is terminated
II. assets are sold for less than UCC of asset class
III. assets are sold for more than UCC of asset class
a) I only
b) I, II, and III
c) II or III only
d) I or III only
Financial Analysis Tools 3 – 18
41. Five years ago, Ottawa Styling Institute bought a hair straightening machine for
$200,000. Assume the machine is the only asset in its class. The company has just sold
the machine for $235,000. The UCC of the asset class just before the sale is $85,000.
The tax consequences of this sale are:
I. Capital gain
II. CCA recapture
III. CCA terminal loss
a) I only
b) I and II only
c) I and III only
d) II only
42. Five years ago, Ottawa Styling Institute bought a hair straightening machine for
$200,000. Assume the machine is the only asset in its class. The company has just sold
the machine for $235,000. The UCC of the asset class just before the sale is $85,000.
In terms of total amounts, the total taxable items of this sale are:
a) $17,500
b) $35,000
c) $115,000
d) $132,500
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43. Five years ago, J.Hi Corp. bought a paper cup making machine for $50,000.
Assume the machine is the only asset in its class. The company has just sold the
machine for $35,000. The UCC of the asset class just before the sale is $15,000. What
are the tax consequences of this sale?
a) There is zero tax consequence since the machine was sold for less than its
acquisition cost.
b) A capital loss of $15,000.
c) A CCA recapture of $20,000.
d) A terminal loss of $20,000.
Financial Analysis Tools 3 – 20
PRACTICE PROBLEMS
44. A company has net income this year of $45,500. Last year, the company’s net
working capital was $14,300 and this year’s net working capital is $15,200. Depreciation
this year is $7,300. What is cash from operations this year?
a) Net income
b) Add depreciation
c) Subtract change in NWC
d) CFO
45. A company has revenue this year of $756,000, an 11% increase from last year. The
company’s net profit margin this year is 7.8%, and net working capital in each year is
equal to 12.7% of revenue. Depreciation this year is $39,300. What is Cash from
operations this year?
Last Year This Year
Revenue 681,081 756,000
Net Income 58,968
Net working capital 86,497 96,012
Depreciation 39,300
Net Income 756,000
Add Depreciation 39,000
Subtract Change in NWC -9,515
CFO 785,785
Type: Concept
Level of Difficulty: Difficult
Learning Objective: Analyze a firm’s financial statements
Section Reference: Canadian Pacific Accounting
46. Fred is confused. He has just deposited $100 in his savings account and the cashier
said: “Your account will be credited with $100.” Fred knows that depositing the cash in
his account has increased his assets and therefore his savings account should be
debited, so why is the bank crediting his account?
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47. Mira is considering two job offers: one in Montreal and the other in Halifax. She
found that it would pay her the same amount in terms of gross salary. What else should
she consider in terms of decision making?
48. Charles is considering investing in PDQ Technical Instruments. He feels this is a
good investment because the auditor said: “…in our opinion, these consolidated
financial statements present fairly, in all material respects, the financial position of PDQ
Technical Instruments.” Comment on Charles’ reasoning.
49. In the text the author says: “…corporate finance strategies that are based on the
U.S. tax code are not directly applicable in Canada or Europe”. Why is this true?
Discuss.
50. Why is an increase in net working capital a decrease in free cash flow?
51. Why is the tax deductibility of interest important for firm decision making?
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52. It is April and Michael is doing his taxes and is very confused. In his finance text
book, it says that in Canada the tax system was designed to reduce the double taxation
of dividends from Canadian corporations. However, he finds that on his tax return he
has to “gross–up” the amount of the dividends he received and add that to his income.
Explain to Michael how the Canadian personal tax system reduces the double taxation
of dividends.
53. Explain the rationale behind the half-year rule.
54. Montreal Smoked Meat Company (MSM) purchased a machine on February 1,
2014 for $25,000. On October 10, 2014 it purchased another machine for $50,000. Both
machines have a CCA rate of 30% and are in the same asset class. These are the only
Financial Analysis Tools 3 – 24
machines in the class and the company made no asset purchases or sales for the
following two years. MSM’s fiscal year end is December 31. Complete the following
table (and show your work):
Fiscal year end UCC (beginning of year) CCA UCC (end of year)
2014
2015
2016
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Financial Analysis Tools 3 – 26
LEGAL NOTICE
The data contained in these files are protected by copyright. This manual is furnished
under licence and may be used only in accordance with the terms of such licence.