Cooper Consulting Limited (Cooper) is an engineering firm located in Calgary, Alberta. It is a very successful company looking to attract additional investors to provide them with an infusion of capital for expansion purposes. The president of Cooper, Arlene Phi, has indicated to Mary Sharper the controller, the importance of maximizing income so that additional investors will be confident in the company_
In the past year, Cooper had consulting revenue of $1.5 million. Revenue has been increasing at a rate of 10% a year for the last three years, and this trend is expected to continue. The company has a December 31 year end.
On July 1, 2010, Cooper purchased and installed a new computer system, the cost of which is detailed below. The system hardware has an expected life of five years; the systems and application software has an upfront cost and an annual license fee that covers the cost of upgrades. At the end of its useful life the hardware will be donated to a charity resulting in an expected tax saving of $4,000.
Hardware $102,000
Systems software 4,000
Transportation 400
Installation costs 500
Total cost before taxes 107r000
GST 5% (fully recoverable) 5:350 Total including taxes $112,350
Application software $ 21,400
DST 5% (fully recoverable) 1.070 Total including taxes $ 22,470
The company has various tangible capital assets, all of which have been depreciated on a declining balance using the appropriate Capital Cost Allowance (CCA) rate. It has been company policy to charge a half-year depreciation in the years of acquisition and disposal. This method has been used so that depreciation for accounting and tax purposes will be the same. The computer hardware and systems software are CCA Class 50 with a 55% rate. The application software is CCA Class 12 with 100% rate_
Mary Sharpe needs to decide how depreciation should be calculated on the new computer system. She knows that the straight-line method will result in more accurate matching of cost with revenue_ To increase income, she is considering two policy changes. The first is to begin depreciating all capital assets using the straight-line depreciation method_ The second is that no depreciation will be charged in the year of acquisition and a full year will be charged in the year of disposal.
The company also operates a fleet of five vehicles_ Each year the vehicles receive a full range of preventive maintenance. Mary has decided to capitalize these costs so that net income will be higher this year.
Answer the following questions (show all work):
1. What is the depreciation expense for 2010 using the company's existing method?
2. What is the depreciation expense for 2010 if Mary incorporates her changes to how depreciation expense is calculated?
3. What is the depreciation expense for 2011 using the company's existing method and based on Mary's proposed change?
4. As a professional accountant Mary is bound by a code of ethics to follow recognized accounting standards. How should Mary account for the preventive maintenance on the vehicles under IFRS?