ACCT226 Chapter 5 Problem 10 PDF

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Summary

ACCT226 Chapter 5 Problem 10...

Description

The following information relates to Andorn Ltd. for its taxation year that ends on December 31, 2019:

1.

The Company has UCC balances on January 1, 2019 for its tangible assets as follows:

Class 1 (A single building acquired in 2008)

2.

$478,695

Class 8

243,000

Class 10

126,000

Class 13

127,500

During 2019, the building that was acquired in 2008 was sold for cash of $650,000. Of this total, $125,000 represented the value of the land on which the building was situated. The building had a capital cost of $625,000, of which $80,000 represented the value of the land at time the building was acquired.

The building was replaced during 2019 with a new building at a cost of $745,000, of which $125,000 represented the value of the land.

The old building was used 100 percent for office space and was allocated to a separate Class 1. The new replacement building is also used 100 percent for office space and is allocated to a separate Class 1.

3.

During 2019, the Company purchased office furnishings for $74,000. They traded in older furnishings and received an allowance of $17,000. The capital cost of the furnishings that were traded in was $56,000.

4.

The only vehicle purchased during 2019 was a Lexus to be used by the president of the Company. The cost of this car was $93,000. The president drives it 23,000 kilometers during the year, of which 5,750 kilometers are for employment related purposes.

5.

Andorn conducts some of its business out of a building which it leases. The lease was signed on January 1, 2017 and had an initial term of 7 years. It has an option to renew for 3 years. At the time the lease was signed, Andorn spent $150,000 on leasehold improvements.

6.

During 2015, the Company purchased two franchises. The first, which was purchased on August 1, 2015, had cost $62,000 and a legally limited life of 8 years. The second, purchased on September 5, 2015, cost $84,000 and had an unlimited life. This second franchise was sold during 2019 for $65,000.

7.

Andorn Ltd. has always deducted the maximum CCA and the maximum write-off of cumulative eligible capital allowable in each year of operation.

Required: Calculate the maximum CCA write-off that can be deducted for 2019. Your answer should include the maximum that can be deducted for each CCA class. In addition, indicate the amount of any recapture or terminal loss that results from dispositions during 2019.

Class 1 The calculations related to the building that was replaced are as follows:

Opening UCC Balance

$478,695

Disposition - Lesser Of: Proceeds = $525,000 ($650,000 - $125,000) Capital Cost = $545,000 ($625,000 - $80,000)

( 525,000)

Negative Ending Balance = Recapture Of CCA

($ 46,305)

There is also a capital gain resulting from the sale of the land. However, the requirements of the problem are limited to CCA, recapture, and terminal losses. Since the replacement building is new, used 100 percent for non-residential purposes and allocated to a separate Class 1, it qualifies for an enhanced CCA rate. As it is not used for manufacturing and processing, the enhanced rate is 6 percent. Using this rate, the CCA on the new building would be as follows:

Opening UCC Balance Additions ($745,000 - $125,000) AccII Adjustment [(50%)($620,000)] CCA Base Rate

Nil $620,000 310,000 $930,000 6%

Maximum CCA

$ 55,800

Class 8 The required calculation here would be as follows:

Opening Class 8 Balance Additions

$243,000 74,000

Disposals: Lesser Of: Capital Cost = $56,000 Proceeds = $17,000

( 17,000)

AccII Adjustment [(50%)($74,000 - $17,000)] CCA Base Rate Maximum CCA

28,500 $328,500 20% $ 65,700

Class 10 The required calculations here would be as follows:

Opening UCC Balance And CCA Base Rate Maximum CCA

$126,000 30% $ 37,800

Class 10.1 The Lexus would be allocated to a separate Class 10.1. The amount would be limited to $30,000. The kilometers driven for personal purposes would affect the taxable benefit, but does not affect the CCA.

Opening UCC Balance

Nil

Additions

$30,000

AccII Adjustment [(50%)($30,000)] CCA Base Rate Maximum CCA

15,000 $45,000 30% $13,500

Class 13 Class 13 is a straight-line class. In this case, the term of the lease and one renewal totals ten years, resulting in a 10 year write off. The maximum CCA would be $15,000 ($150,000 ÷ 10).

Class 14 The limited life franchise would be allocated to Class 14 and amortized on a straight line basis over its legal life. Although this franchise was purchased on August 1, this would only affect the year of acquisition and the last year of its life. The maximum CCA would be for a complete year and would equal $7,750 ($62,000 ÷ 8).

Class 14.1 In 2015, the cost of the unlimited life franchise was allocated to the Company’s CEC account. The relevant calculations for 2015 and 2016 are as follows:

CEC Balance

CEC Deductions

2015 Addition [(3/4)($84,000)]

$63,000

CEC Amount At 7 Percent

( 4,410)

January 1, 2016 Balance

$58,590

CEC Amount At 7 Percent

( 4,101)

4,101

CEC Balance - December 31, 2016 And Total CEC Deductions

$54,489

$8,511

$4,410

This December 31, 2016 balance was transferred to Class 14.1, establishing the January 1, 2017 UCC for this Class. In order to deal with the 2019 disposition, we need to determine the January 1, 2019 UCC for Class 14.1. As the balance relates to a pre-2017 transaction, it would be amortized for the next ten years at a rate of 7 percent, rather than the regular 5 percent rate applicable to Class 14.1. January 1, 2017 UCC

$54,489

2017 CCA [(7%)(54,489)]

( 3,814)

January 1, 2018 UCC

$50,675

2018 CCA [(7%)($50,675)]

( 3,547)

January 1, 2019 UCC Using this balance, the 2019 disposition would be recorded as follows:

$47,128

January 1, 2019 UCC

$47,128

Deemed Acquisition - Lesser Of: 25% Of Proceeds Of Disposition [(25%) ($65,000)] = $16,250 25% Of Capital Cost [(25%)($84,000)] = $21,000 Adjusted Balance

16,250 $63,378

Disposition - Lesser Of: Capital Cost = $84,000 Proceeds Of Disposition = $65,000 Negative Ending Balance Recapture January 1, 2020 UCC

( 65,000) ($ 1,662) 1,662 Nil

In terms of the economics underlying this $1,662 negative balance, the amount can be verified as follows:

Unrecognized Loss On Disposition ($84,000 - $65,000) Transitional Inclusion Rate

`$19,000 3/4

Balance

$14,250

Recapture Of CEC ($4,410 + $4,101)

( 8,511)

Recapture Of CCA ($3,814+ $3,547)

( 7,361)

December 31, 2019 Class 14.1 Balance

($ 1,662)

Summary (Required) The total maximum CCA is calculated as follows:

Class 1

$ 55,800

Class 8 Class 10

65,700 37,800

Class 10.1

13,500

Class 13

15,000

Class 14

7,750

Class 14.1 Total CCA

Nil $195,550

Other Income Effects In addition to CCA, the following income effects resulted from the information provided in the problem: •

Class 1 recapture of $46,305, and

•

Class 14.1 recapture of $1,662....