ACCT226 Chapter 8 Exam Exercise #3 PDF

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Exam Exercise Chapter 8 - Warranties On Capital AssetsDuring 2018, John Ritton sells a capital asset with an adjusted cost base of $126,000 for proceeds of disposition that total $182,000. He provides the purchaser with a one year warranty that he estimates will cost $2,600 to provide. During 2019, ...

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Exam Exercise Chapter 8 - Warranties On Capital Assets During 2018, John Ritton sells a capital asset with an adjusted cost base of $126,000 for proceeds of disposition that total $182,000. He provides the purchaser with a one year warranty that he estimates will cost $2,600 to provide. During 2019, he spends $2,400 to fulfill the warranty provision. Determine the effect of these transactions on Net Income For Tax Purposes for 2018 and 2019.

Exam Exercise Chapter 8 - Capital Gains Reserve During June, 2019, Ms. Janet Houston sells a capital asset with an adjusted cost base of $112,500, for proceeds of $172,300. She receives $33,000 of this amount in cash, with the balance due at the end of the following year. What is the minimum amount that she will have to include in her 2019 Net Income For Tax Purposes as a result of this transaction?

Exam Exercise Chapter 8 - Capital Gains Reserve During 2018, Jack Harris sells a capital asset with an adjusted cost base of $87,200 for proceeds of $105,300. He receives a down payment of $5,300 in 2018, a second payment of $50,000 in 2019, and a final payment of $50,000 in 2020. What is the minimum amount that Jack will have to include in Net Income For Tax Purposes in 2018, 2019, and 2020 as a result of this sale?

Exam Exercise Chapter 8 - Bad Debts On Capital Assets During 2018, a capital property with an adjusted cost base of $131,000 is sold for $115,000. The proceeds of disposition are made up of $82,000 in cash, plus the purchaser’s one-year note for $33,000. In 2019, the note proves to be uncollectible. What are the tax consequences of these events in 2018 and 2019?

Exam Exercise Solution Chapter 8 - Warranties On Capital Assets In 2018, there will be a taxable capital gain of $28,000 [(1/2)($182,000 - $126,000)]. When the warranty costs are incurred in 2019, there will be an allowable capital loss of $1,200 [(1/2)($2,400)]. Any loss that cannot be deducted in the current year is subject to the carry over provisions described in Chapter 11.

Exam Exercise Solution Chapter 8 - Capital Gains Reserve The capital gain on the property would be $59,800 ($172,300 - $112,500). As $139,300 ($172,300 $33,000) of the proceeds remain uncollected, the maximum reserve is the lesser of:

[($59,800)($139,300 ÷ $172,300)]

$48,347

[($59,800)(20%)(4 - 0)]

$47,840

The addition to her Net Income For Tax Purposes is $5,980 [(1/2)($59,800 - $47,840)].

Exam Exercise Solution Chapter 8 - Capital Gains Reserve The capital gain on the property would be $18,100 ($105,300 - $87,200). At the end of 2018, the balance owing would be $100,000 ($105,300 - $5,300). Based on this, the 2018 reserve is the lesser of: [($18,100)($100,000 ÷ $105,300)

$17,189

[($18,100)(20%)(4 - 0)]

$14,480

This means that the Net Income For Tax Purposes inclusion for 2018 would be $1,810 [(1/2)($18,100 $14,480)]. At the end of 2019, the balance owing would be $50,000 ($100,000 - $50,000). Based on this, the 2019 reserve is the lesser of:

[($18,100)($50,000 ÷ $105,300)

$ 8,594

[($18,100)(20%)(4 - 1)]

$10,860

The capital gain for 2019 would be calculated as follows:

2018 Reserve

$14,480

2019 Reserve

( 8,594)

2019 Capital Gain

$ 5,886

The Net Income For Tax Purposes inclusion for 2019 would be $2,943 [(1/2)($5,886)]. At the end of 2020, all of the proceeds have been collected. Given this, no reserve can be deducted. However, the 2019 reserve will have to be added back to income, resulting in a Net Income For Tax Purposes inclusion of $4,297 [(1/2)($8,594)].

Exam Exercise Solution Chapter 8 - Bad Debts On Capital Assets For 2018, there will be an allowable capital loss of $8,000 [(1/2)($115,000 - $131,000)]. For 2019, there will be an allowable capital loss of $16,500 [(1/2)(Nil - $33,000)]. Both of these allowable capital losses will only be deductible against taxable capital gains....