On July 1, 2011, Silver Stone Company purchased equipment for a cost of $450,000 with an expected useful life to 15 years and an anticipated residual value of $30,000. This is the company's only capital asset and, for tax purposes, it is a Class 8 asset with a CCA rate of 20%. Silver Stone's income tax rate is 25%.
For the year 2012 (the second year of the equipment's life), Silver Stone reported sales of $1,500,000 and operating expenses other than depreciation of $1,050,000. In addition to the equipment, the company held other assets with a total carrying value of $930,000 on December 31, 2012.
Required:
a. Assuming Silver Stone uses straight-line depreciation, what amount of net earnings will it report for 2012? What will its return on assets be, using the year-end value of the total assets and assuming there is no interest expense?
b. What is the maximum amount of CCA that Silver Stone could claim for tax purposes in 2012? Based on this, how much taxable income will the company have and how much income tax will it have to pay for 2012?
c. Give the journal entry to record the company's income taxes for 2012.
d. If Silver Stone had used double-declining-balance depreciation (in both 2011 and 2012), what amount of net earnings would it have reported for 2012? What would the return on assets have been (again using the year-end value of the total assets and assuming there is no interest expense)?
e. For what type of assets is it appropriate to use double-declining-balance depreciation?