Deck 6: The Acquisition, Use, and Disposal of Depreciable Property

Question 1

TEX Co.was incorporated in 2020.Incorporation costs were $3,500.How much CCA is allowed in 2020 and how much operating expense is allowed in the year? (Round answers to 0 decimal places.)

A)$38, $3,000
B)$25, $3,000
C)$175, $0
D)$225, $500

Answer 1

A

Question 2

SAMI Ltd.was incorporated on January 1, 2020.The incorporation costs were $4,500.SAMI then purchased WELL Co.The assets of WELL Co.included $80,000 of equipment, goodwill of $50,000 and a customer list valued at $30,000.SAMI's year-end is December 31.The company maximizes its allowable deductions.How much is SAMI's Class 14.1 UCC at the end of 2020?

A)$74,000
B)$75,387
C)$78,162
D)$149,387

Answer 2

B

Question 3

BIG Co.purchased a piece of Class 8 machinery in June of 2018.The cost of the machine was $5,000.In 2020 the machine was sold for proceeds of $2,000 and there were no other purchases or disposals during the year.The UCC in the Class 8 pool was $5,500 at the beginning of 2020.What is the UCC of this class at the end of 2020?

A)$700
B)$2,800
C)$3,500
D)$4,800

Answer 3

B

Question 4

Which of the following statements regarding recapture is true?

A)Recapture only occurs when there is a positive balance in a class pool and that pool of assets is empty.
B)Recapture may be deducted from business income.
C)Recapture occurs when there is a positive balance in a class pool, even if there are assets remaining in that class pool.
D)Recapture occurs when there is a negative balance in a class pool, even if there are assets remaining in that class pool.

Question 5

EARTH Inc.began operating ten years ago and has always claimed the maximum CCA.The company has a December 31st year-end.
The following information is known about EARTH's capital assets in 2020.
The undepreciated capital cost in Class 8 was $10,000 at the end of 2019.None of the assets in the class were purchased in 2019.
In 2020, EARTH expanded into the manufacturing of recycling bins and purchased a Class 53 asset for $50,000.
The undepreciated capital cost in Class 10 was $12,000 at the end of 2018.Due to the company's growth, EARTH sold the only asset in the pool (a small pickup truck) on December 20th of 2019 for $5,000.On the same day, EARTH spent $8,000 on a slightly larger used truck to use temporarily until an appropriate work truck could be found in the upcoming year.The company did not conduct any business activities between December 20th, 2019 and January 2nd, 2020.
Required:

A) Calculate the net increase or decrease in EARTH's net income for tax purposes for 2020 if the maximum CCA is claimed.
B) Based strictly on the information provided, what tax advice would have been beneficial for EARTH in 2019 in order to minimize the company's net income for tax purposes?

Question 6

Which of the following cases is not eligible for capital cost allowance in the current year?

A)A new engine is installed in a semi-trailer that is used to haul produce to Mexico.
B)An employee owns and uses an automobile in the course of their employment duties during the month of December.Their pay for December is not received until January of the following year.
C)A piece of equipment was purchased during the year on a 5 year financing term.
D)A building under construction is scheduled for completion in eighteen months.The building will be used as a production facility.

Question 7

Lou Silva has owned and operated The Wellness Store for fifteen years.The company's year-end is December 31st.
The following chart lists the company's assets owned prior to 2020 and their UCC balances as of January 1, 2020.
The following transactions took place in 2020:
a.Lou purchased $2,000 worth of small tools (each costing under $500).
b.The delivery van was sold for $12,000.The original cost was $20,000.A second-hand van was purchased in the year for $16,000.
c.$15,000 was paid for an air conditioning system in the building, which was added to the cost of the standard Class 1 pool.
d.Lou sold the photocopier for $1,500 in the year, and will replace it in January, 2021 with a second-hand model valued at $1,700.
e.Lou amortizes the patent in Class 44.
f.The business acquired a franchise on March 1^st of 2020 for $55,000.The franchise has a limited legal life of 20 years.(Ignore leap year effects.)
Required:

A) Calculate the following:
1) the total CCA that Lou will be able to claim in 2020
2) any recapture and/or terminal loss that occurred during the year.
B)What would the tax effect have been for the original photocopier if Lou had purchased the new photocopier during 2020?

Question 8

In 2019 a storage facility was destroyed in a fire.The UCC of the building was $47,000 and the original cost was $50,000.Insurance proceeds of $55,000 were received for the market value in 2019.Pursuant to S.13(4), the taxpayer elected to defer the recapture.A new building was built in 2020 at a cost of $60,000.How much is the amended recapture in 2020?

A)$0
B)$3,000
C)$8,000
D)$13,000

Question 9

WKL Ltd.is a Canadian-controlled private corporation operating a small land-development business.In June 2020, the company acquired a license to manufacture pre-fab homes and began operations immediately.Financial information for the 2020 taxation year is outlined below:
WKL's profit before income taxes for the year ended November 30, 2020, was $245,000, as follows:

The loss on sale of property resulted from two transactions.On October 1, 2020, WKL sold all of its shares of Q Ltd., a 100% subsidiary, for $100,000.(The shares were acquired seven years ago for $80,000.) Also, during the year, WKL sold some of its vehicles for $25,000.The vehicles originally cost $50,000 and had a book value of $48,000 at the time of sale.New vehicles were obtained under a lease arrangement.
The 2019 corporate tax return shows the following ending UCC balances:

WKL occupies leased premises under a seven-year lease agreement that began three years ago.At the time, WKL spent $60,000 to improve the premises.The lease agreement gives WKL the option to renew the lease for two three-year periods.WKL began manufacturing pre-fab homes on June 1, 2020.At that time, it acquired the following:

Accounting amortization in 2020 amounted to $60,000.
WKL normally acquires raw land, which it then develops into building lots for resale to individuals or housing contractors.In 2020, it sold part of its undeveloped land inventory to another developer for $400,000.The sale realized a profit of $80,000, which is included in the land-development income above.The proceeds consisted of $40,000 in cash, with the balance payable in five annual instalments beginning in 2021.
Travel and entertainment expense includes the following:
Legal and accounting expense includes the following:

Required:

A) Calculate WKL's net income for tax purposes for the 2020 taxation year.
B) Explain why the $3,000 accounting loss on the sale of properties differs from any tax gains/losses from part A.Prepare a journal entry in your answer.
(Adapted from "Problem Eleven" from Chapter Six of previous editions of the textbook)

Question 10

Which of the following situations would not be permitted to defer the recognition of any recapture that might arise from the disposition of an asset?

A)A building that was used for income earning purposes was destroyed in a flood.Insurance proceeds were received which generated recapture.A new building was built 18 months later.
B)A piece of equipment that belonged to a company was stolen in November 2019.Insurance proceeds were received which generated recapture.The equipment was replaced in December of 2020.
C)A piece of equipment that belonged to a construction company was sold in June 2019.The proceeds from the sale generated recapture.A new piece of equipment was purchased in January of 2020.The company's fiscal year-end is December 31^st.
D)A building that was used for income earning purposes was sold in December 2019.The proceeds from the sale generated recapture.A new building was purchased in April 2020.The company's fiscal year-end is December 31^st.