ACCT226 MCQ and Answer Chapter 8 #1 PDF

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Which of the following statements with respect to capital gains is NOT correct? A. Insurance proceeds to compensate for a business building destroyed in a fire is a proceeds of disposition. B. The adjusted cost base of capital assets is reduced by any government assistance received for their acquisi...

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1.

Which of the following statements with respect to capital gains is NOT correct?

A. Insurance proceeds to compensate for a business building destroyed in a fire is a proceeds of disposition. B. The adjusted cost base of capital assets is reduced by any government assistance received for their acquisition. C. The lifetime capital gains deduction reduces the amount of capital gains included in Net Income For Tax Purposes. D. The expropriation of a capital asset by a municipal government is considered to be a disposition.

2.

Which of the following statements with respect to capital gains is correct?

A. The inclusion rate for taxable capital gains has always been one-half of the capital gain. B. All gains on the sale of Canadian securities are treated as capital gains. C. The favourable taxation of capital gains is designed to partially compensate businesses for the effects of inflation. D. The lifetime capital gains deduction is no longer available to Canadian individuals.

3.

The term proceeds of disposition can be used in a number of situations. Indicate which of the following would not be considered proceeds of disposition for the PD Company.

A. Amounts paid to PD Company under insurance policies for property that has been destroyed. B. Amounts paid to PD Company under insurance policies for property unlawfully taken. C. Amounts paid to PD Company by a municipal government for property that has been expropriated. D. Amounts paid to PD Company on the sale of inventories. E. Amounts paid to PD Company on the sale of a warehouse.

4.

Which of the following statements about the tax treatment of gifts of capital assets is NOT correct?

A. The adjusted cost base to the recipient will be the fair market value of the asset gifted. B. The tax treatment of gifts is different when the gift is made to a non-arm’s length party rather than to an arm’s length party. C. The proceeds of disposition to the person giving the gift will be the fair market value of the asset gifted. D. If the fair market value of the asset being given exceeds its tax cost to the person giving the gift, that person will have a capital gain.

5.

Which of the following is NOT included in ITA 53 as an adjustment to the cost base of an asset?

A. Government assistance with the cost of acquisition. B. CCA taken in previous years. C. Superficial losses. D. In the case of vacant land, interest and property taxes.

6.

Carine purchased a piece of land with her inheritance. She was planning to open a mini-golf course and put in a zip-line course. Carine had been laid off for a year and could not find work as a golf pro. After spending some time researching mini-golf and zip line course designs, she received a job offer which she decided to take. She has received an offer to purchase the land at a significant gain. Which of the following statements is correct?

A. Since Carine’s primary intent was to use the land in her business, the gain is business income. B. Since Carine’s primary intent was to use the land in her business, the property taxes on the land are deductible. C. Since Carine’s primary intent was to use the land in her business, the gain is a capital gain. D. Since the gain relates to property, the gain is property income.

7.

On November 12, 2019, Hubert Robbins sells 100 shares of Loser Inc. for $120 per share. He had purchased these shares several years ago at $220 per share. On November 18, 2019, he acquires 80 shares of Loser Inc. for $100 per share. On December 22, 2019, he acquires 50 shares of Loser Inc. at $80 per share. What is the adjusted cost base of the 130 shares that he holds after the December 22, 2019 purchase?

A. $12,000. B. $20,000. C. $22,000. D. $14,000.

The calculations are as follows: November 12 Sale Proceeds Of Disposition [(100)($120)]

$12,000

Adjusted Cost Base [(100)($220)]

( 22,000)

Capital Loss

($10,000)

Disallowed Portion [($10,000)(80 ÷ 100)]

8,000

Allowed Portion

($ 2,000) Cost Of 130 Shares

November 18 Purchase [(80)($100)]

$ 8,000

Disallowed Loss

8,000

December 22 Purchase [(50)($80)] Adjusted Cost Base

8.

4,000 $20,000

Chi has the following transactions in Smoke Corp. and Mirrors Corp. shares:

Smoke

Mirror

May 1, 2018 Purchase

100 @ $22.50

100 @ $25.00

December 20, 2018 Sale

100 @ $28.00

100 @ $24.00

January 3, 2019 Purchase

N/A

100 @ $23.20

June 1, 2019 Sale

N/A

100 @ $26.00

Chi’s taxable capital gains for 2018 and 2019 are:

A. $225 for 2018, $90 for 2019 B. $225 for 2018, $140 for 2019 C. $275 for 2018, $90 for 2019 D. $275 for 2018, $140 for 2019

$275 for 2018, $90 for 2019 Smoke shares: 100 x ($28.00 – 22.50) = $550 x 50% = $275 2018 Mirrors shares: 100 x ($25.00 – 24.00) = $100 superficial loss 2019 Mirrors shares: (100 x $26.00) – [ (100 x $23.20) + $100 superficial loss ] = $180 x 50% = $90

9.

With respect to dispositions of capital assets, which of the following statements is correct?

A. The cost of providing a warranty on the sale of a capital asset cannot be deducted for tax purposes. B. When identical properties are sold, the cost can be determined using either FIFO or Average Cost valuation. C. The cost of providing a warranty on the sale of a capital asset can be deducted in full in the determination of business income. D. If a portion of a property is sold, the adjusted cost base must be determined using the fair market value of the portion sold as a fraction of the total fair market value of the property.

10. Which of the following statements is NOT correct?

A. When there is a disposition of an identical property, the taxpayer must use the average cost of all such properties as the adjusted cost base. B. When a taxpayer provides a warranty on the sale of a capital asset, the cost incurred to provide the warranty is treated as a capital loss. C. When there is a partial disposition of land that is held as a capital asset, the adjusted cost base must be based on a proportionate share of the total area of the land. D. When a bad debt arises from the sale of a capital asset, its writeoff must be treated as a capital loss.

1.

C. The lifetime capital gains deduction reduces the amount of capital gains included in Net Income For Tax Purposes.

2.

C. The favourable taxation of capital gains is designed to partially compensate businesses for the effects of inflation.

3.

D.

4.

B. The tax treatment of gifts is different when the gift is made to a non-arm’s length party rather than to an arm’s length party.

5.

B.

CCA taken in previous years.

6.

C. gain.

Since Carine’s primary intent was to use the land in her business, the gain is a capital

7.

B.

$20,000. The calculations are as follows:

Amounts paid to PD Company on the sale of inventories.

November 12 Sale Proceeds Of Disposition [(100)($120)]

$12,000

Adjusted Cost Base [(100)($220)]

( 22,000)

Capital Loss

($10,000)

Disallowed Portion [($10,000)(80 ÷ 100)] Allowed Portion

8,000 ($ 2,000)

Cost Of 130 Shares November 18 Purchase [(80)($100)] Disallowed Loss

8,000

December 22 Purchase [(50)($80)]

4,000

Adjusted Cost Base

8.

C.

$ 8,000

$20,000

$275 for 2018, $90 for 2019

Smoke shares: 100 x ($28.00 – 22.50) = $550 x 50% = $275 2018 Mirrors shares: 100 x ($25.00 – 24.00) = $100 superficial loss 2019 Mirrors shares: (100 x $26.00) – [ (100 x $23.20) + $100 superficial loss ] = $180 x 50% = $90

9.

D. If a portion of a property is sold, the adjusted cost base must be determined using the fair market value of the portion sold as a fraction of the total fair market value of the property.

10. C. When there is a partial disposition of land that is held as a capital asset, the adjusted cost base must be based on a proportionate share of the total area of the land. Proportionate allocation would not be appropriate if there are variances in the quality of the land (e.g., one part was a swamp that could not be used)....