Phoenix Corp. purchased Machine no. 201 on May 1, 2014. The following information relating to Machine no. 201 was gathered at the end of May:
Price ....................... $85,000
Credit terms .................... 2/10, n/30
Freight-in costs .................. $800
Preparation and installation costs ........... $3,800
Labour costs during regular production operations .... $10,500
It was expected that the machine could be used for 10 years, after which the residual value would be zero. Phoenix intends to use the machine for only eight years, however, and expects to then be able to sell it for $1,500. The invoice for Machine no. 201 was paid on May 5, 2014. Phoenix has a December 31 year end. Depreciation expense should be calculated to the nearest half month.
Instructions
(a) Calculate the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
1. Straight-line method for the fiscal years ended December 31, 2014, and 2015
2. Double-declining-balance method for the fiscal years ended December 31, 2014, and 20 I 5
*(b) Calculate the capital cost allowance for the 2014 and 2015 tax returns, assuming a CCA class with a rate of 25%.
(c) The president of Phoenix tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company's depreciation expense to the early years and more to later years of the assets' lives. Which method would you recommend? Explain.
(d) In your answer to part (c) above, how would cash flows to the new company be affected by the choice of depreciation method? How would current and potential creditors interpret the choice of depreciation method?
(e) Assume that Phoenix selects the double-declining-balance method of depreciation. In 2016, demand for the product produced by the machine decreases sharply, due to the introduction of a new and better competing product on the market. On August 15, 2016, the management of Phoenix meets and decides to discontinue manufacturing the product. On September 15, 2016, a formal plan to sell the machine is authorized. On this date, the machine meets all criteria for classification as held for sale, and the machine's fair value less costs to sell is $65,500. Calculate the depreciation expense for 2016.