1. In 2018, Karl\'s Corporation purchased a new photocopier (asset class 8) with

Question

1. In 2018, Karl's Corporation purchased a new photocopier (asset class 8) with a CCA rate of 20% for $5,000, as well as a new truck (asset class 10) with a CCA rate of 30% for $40,000.

Calculate the total CCA for Karl's Corporation for each of the first three years. Show your calculation.

2. ABC Corporation is a large retailer that has many stores in Canada. Each location has a store manager who receives a fixed salary regardless of the sales figures. Is agency problem likely an issue in ABC Corporation? Explain.

Explanation / Answer

Answer 1)

Capital Cost Allowance (CCA) is used by businesses in Canada to claim depreciation expense for calculating taxable income.

Here, two asset class under Asset class 8 and Asset class 10., which indicate claim of 20% and 30% respectively .

Capital cost allowance will be calculated as follows:

Year

Calculated CCA

1

I*d

2

I*d (1-d)

3

I*d (1-d)^2

n

I*d(1-d)^(n-1)

Where, I = investment , d= CCA rate per year for discount in tax purpose

Answer 2) Agency problem is define as conflict to achieve objectives of business by stock holders and managers.The major objective of a stock holders is shareholders wealth maximization while mangers are more concern about the operational part of business. As the store mangers are neither getting share in profit nor any representation in company stock holdings . such situation may consider as point to raise a agency problem in the business.

Year

Calculated CCA

1

I*d

2

I*d (1-d)

3

I*d (1-d)^2

n

I*d(1-d)^(n-1)

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