ACCT226 Chapter 5 Problem 5 PDF

Preview

Summary

ACCT226 Chapter 5 Problem 5...

Description

Votex Inc. closes its books on December 31 of each year. On January 1, 2019, the following information on the CCA classes of the business was contained in its records:

Class 1 The buildings in Class 1 were acquired in January, 2008 at a cost of $734,000, with $84,000 of this total being allocated to land. The UCC balance on January 1, 2019 was $562,154.

Class 8 The equipment in Class 8 was acquired in January, 2013 at a cost of $78,500. The UCC balance on January 1, 2019 was $23,520.

Class 10 The vehicles in Class 10 were acquired in June, 2016 at a total cost of $82,000. The UCC balance on January 1, 2019 was $34,153.

During the 2019 fiscal year, the following transactions occurred:

Sale Of Buildings - A similar decision is made with respect to the buildings. They are sold for $825,000 and replaced with leased premises. Of the $825,000 received, $100,000 is for the land on which the buildings are situated. The lease term is for 4 years with no options for renewal. A total of $81,000 is spent on leasehold improvements to make the buildings more suitable for the business.

Sale Of Equipment - As the result of an extensive analysis, it is decided that it would be better to sell the existing equipment and to replace it with improved equipment that will be leased. The old equipment is sold for $32,500.

Sale Of Vehicles - The Class 10 vehicles were sold during the current year and replaced with leased vehicles. The sale proceeds totaled $27,500 with no vehicle being sold for more than its cost.

Sale Of Goodwill - In order to further streamline its operations, Votex Inc. sells off a portion of its operations to another company. No depreciable or tangible capital assets were disposed of in this transaction. However, an amount of $225,000 was received for the goodwill of this portion of the business.

Required: For the taxation year ending December 31, 2019 calculate the maximum CCA that can be deducted by Votex Inc. for each CCA class. In addition, calculate the January 1, 2020 UCC balances and indicate any other tax consequences that would result from the described transactions.

Sale Of Buildings The tax consequences of the sale of the buildings can be analyzed as follows:

Opening UCC Balance

$562,154

Dispositions - Lesser Of:

•

Capital Cost ($734,000 - $84,000) = $650,000 •

Proceeds Of Disposition = $725,000 ($825,000 - $100,000)

( 650,000)

Negative Ending Balance

($ 87,846)

Recaptured CCA

87,846

January 1, 2020 UCC Balance

Nil

The sale of the land and buildings would result in taxable capital gains that would be calculated as follows:

Land

Building

Proceeds Of Disposition

$100,000

$725,000

Capital Cost

( 84,000)

( 650,000)

Capital Gain

$ 16,000

$ 75,000

1/2

1/2

$ 8,000

$ 37,500

Inclusion Rate Taxable Capital Gain

There would be no Class 1 CCA for this year. The sale of the buildings would increase Net Income For Tax Purposes of Votex Inc. by $133,346 ($87,846 + $8,000 + $37,500).

Sale Of Equipment The tax consequences of the sale of equipment can be analyzed as follows:

Opening UCC Balance

Dispositions - Lesser Of:

•

Capital Cost = $78,500

$23,520

•

Proceeds Of Disposition = $32,500

Negative Ending Balance Recaptured CCA January 1, 2020 UCC Balance

( 32,500) ($ 8,980) 8,980 Nil

There would be no Class 8 CCA for this year. The sale of the equipment would increase Net Income For Tax Purposes of Votex Inc. by $8,980.

Sale Of Vehicles The tax consequences of the sale of the vehicles can be analyzed as follows:

Opening UCC Balance

$34,153

Dispositions - Lesser Of:

•

Capital Cost = $82,000

•

Proceeds Of Disposition = $27,500

( 27,500)

Ending Balance With No Remaining Assets

$ 6,653

Terminal Loss

( 6,653)

January 1, 2020 UCC Balance

Nil

The terminal loss must be deducted in the year ending December 31, 2019. As a consequence, there will be no Class 10 CCA for the year.

Leasehold Improvements The leasehold improvements must be included in Class 13 and are subject to straight line write-off over the life of the lease. However, the minimum life that may be used is 5 years, resulting in a 2019 CCA deduction of $8,100 [(1/2)($81,000 ÷ 5)] and a January 1, 2020 Class 13 UCC of $72,900.

Sale Of Goodwill - Class 14.1 The tax consequences of the sale of the goodwill can be analyzed as follows:

Opening UCC Balance In Class 14.1

Nil

Disposition - Lesser Of:

•

Capital Cost = Nil

•

Proceeds Of Disposition = $225,000

Nil

December 31, 2019 And January 1, 2020 UCC Balance

Nil

There would be a taxable capital gain resulting from the sale of goodwill. It would be calculated as follows:

Proceeds Of Disposition Capital Cost Capital Gain Inclusion Rate Taxable Capital Gain

$225,000 Nil $225,000 1/2 $112,500

Summary Of CCA And UCC Results (Not Required) The maximum CCA for the year ending December 31, 2019 and the January 1, 2020 UCC balances can be summarized as follows:

Maximum CCA

UCC

Nil

Nil

Class 1 Class 13

$8,100

$72,900

Class 8

Nil

Nil

Class 10

Nil

Nil

Class 14.1

Nil

Nil

In addition, the following income effects resulted from the information provided in the problem:

Recapture On Class 1 Assets Taxable Capital Gain On Land Taxable Capital Gain On Buildings Recapture On Class 8 Assets

$ 87,846 8,000 37,500 8,980

Terminal Loss On Class 10 Assets

( 6,653)

Taxable Capital Gain On Sale Of Goodwill

112,500

Total Inclusion In Net Income For Tax Purposes

$248,173...