Chapter 8 Straight Line Method

Question 1

suppose XYZ Ltd. is located in a building that was purchased two years ago for $1,000,000. The building has an economic life of 10 years with no salvage value. Annual depreciation is calculated using the straight- line method. If XYZ Ltd. earned a net income of $450,000 this year and claimed $38,400 of capital cost allowance this past year, what is XYZ’s taxable income this year?

(1) $511,600
(2) $488,400
(3) $394,600
(4) $387,400

Answer 1

1

Question 2

Depreciation expense is:

(1) another name for capital cost allowance.
(2) a deductible expense in computing income for purposes of income taxation.
(3) usually calculated on land by the straight-line method.
(4) none of the above.

Answer 2

4

Question 3

Fanny Mac Ltd. purchased a small commercial building for $225,000 of which $100,000 was the value of the land. Fanny, the company president, felt this was an excellent deal because she would have been willing to pay as much as $250,000. One year later Fanny sold the property for $300,000.

If, at the time of purchase, the expected economic life of the building was 10 years, there was an estimated salvage value of $25,000 at the end of that time, and Fanny uses the straight-line depreciation method, what is the depreciation expense for the year?

(1) $10,000
(2) $12,500
(3) $20,000
(4) $25,000

Answer 3

1

Question 4

A company has just bought a truck for $22,500. It is expected that the truck can be sold for $3,000 fifteen years from now. The current market value of the vehicle is $27,000. Using the straight-line method, what is the annual depreciation expense?

(1) $1,300
(2) $1,500
(3) $1,600
(4) $1,800

Answer 4

1

22,500 - 3000 = 19,500 divided by 15 years

Question 5

Arco Architects recently purchased $19,000 worth of new office furniture, but with their quantity discount the final cost was only $17,100. It is expected that the furniture can be sold at the end of its 10 year life for
$1,500. What is the annual depreciation expense if Arco uses the straight-line method?

(1) $1,750
(2) $1,560
(3) $1,710
(4) $1,900

Answer 5

2

17100 -1,500 (salvage value)
= 15600 divided by 10 (life of furniture)

= 1,560.00

Question 6

which of the following statements about depreciation cost is true?

1. it is another name for capital cost allowance
2. it is the deductible expense in computing income for purpose of income taxation
3. it is usually calculated on land by the straight-line method
4. it is the method used to allocate the cost of an asset over time

Answer 6

4