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

Question 1

Tom's Tool Rentals began operations in 20x0. All income in the company classifies as 'business income'. The following information pertains to transactions in 20x0.
--Tom signed an 8-year lease for a building when he began the business. The building is in an excellent location and is estimated to be worth $500,000. Tom has an option to renew the lease for an additional 2 years. Tom spent $100,000 in 20x0 on improvements to the leased building at the beginning of the year.
--Tom purchased land and a building adjacent to his business for $120,000 in 20x0 (after March 18, 2007). The building was valued at $50,000, and is used as a storage facility. Tom has chosen to take 4% CCA on the building.
--Tom's inventory of rental tools is valued at $200,000. All of the tools were purchased in 20x0 and are required to be placed in Class 8 by the CRA.
--Tom purchased several small tools in 20x0 that he uses to maintain his rental tools. The total cost of these tools was $8,000, and each tool cost under $500.
--A delivery van costing a total of $50,000 was purchased in 20x0, to be used solely in the business.
--Tom furnished the reception area of his business at a cost of $5000 with Class 8 assets.
--A computer was purchased for tracking sales and inventory. The computer cost $1,000.
--Incorporation costs for the business were $5,000.
--Tom purchased a $42,000 passenger vehicle to be used for the business. In 20x0, the car was driven 20,000 km. 15,000 km were for business. (The car was used exclusively for business in the following years.)
--The business was very successful in the first year so Tom chose to use all of the CCA that was available to him in 20x0.
--Tom is an HST registrant.
The following transactions occurred in 20x1:
--Tom sold the delivery truck for $48,000, and immediately purchased a newer and larger model for $55,000.
--New shelving was purchased for the reception area, at a cost of $1,000.
--Maximum CCA was claimed for the year.
In 20x2 the storage facility was destroyed in a fire. The market value of the building, which was insured, was $55,000. A new building was built one year after the fire at a cost of $60,000.
Required:

A) Calculate the capital cost allowance per class claimed by the company in 20x0 and 20x1. (Round all answers.)
B) Show the amended recapture calculation to be filed pertaining to the storage building in the year the new building will be built.

Answer 1

*$30,000 (HST registrant - no tax included for CCA) * .3 * 1.5 * 15,000/20,000

Question 2

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 the United States.
B) An employee owns and uses an automobile in the course of her employment duties during the month of December. Her 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.

Answer 2

D

Question 3

Miller Co. was incorporated in 20x7. Incorporation costs were $3,500. How much CCA is allowed in 20x7 and how much operating expense is allowed in the year? (Round answers to 0 decimal places. Assume 20x7 is 2019.)

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

Answer 3

A

Question 4

ABC Corp. leased an office and paid $20,000 for leasehold improvements in January of this year. This cost included drywall, new carpets, and all new lighting fixtures. The term of the lease is 2 years plus an option to renew for 2 more years.
Required:
Calculate the maximum CCA that ABC Corp. will be allowed to deduct this year.

Question 5

(Adapted from "Problem Eleven" from Chapter Six of previous editions of the textbook)
Alpha Ltd. is a Canadian-controlled private corporation operating a small land-development business. In June 20x2, the company acquired a license to manufacture pre-fab homes and began operations immediately. Financial information for the 20x2 taxation year is outlined below:
Alpha's profit before income taxes for the year ended November 30, 20x2, was $245,000, as follows:
The loss on sale of property resulted from two transactions. On October 1, 20x2, Alpha 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, Alpha 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 20x1 corporate tax return shows the following UCC balances:
Alpha occupies leased premises under a seven-year lease agreement that began three years ago. At the time, Alpha spent $60,000 to improve the premises. The lease agreement gives Alpha the option to renew the lease for two three-year periods. Alpha began manufacturing pre-fab homes on June 1, 20x2. At that time, it acquired the following:
Accounting amortization in 20x2 amounted to $60,000.
Alpha normally acquires raw land, which it then develops into building lots for resale to individuals or housing contractors. In 20x2, 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 20x3.
Travel and entertainment expense includes the following:
Legal and accounting expense includes the following:
Required:
Calculate Alpha's net income for tax purposes for the 20x2 taxation year. (Assume 20x2 is 2019.)

Question 6

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 7

Green Gardens Inc. purchased a piece of Class 8 machinery in 20x0. The cost of the machine was $5,000. In 20x2, 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 20x2. What is the UCC of this class at the end of 20x2? (Assume 20x2 is 2019.)

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

Question 8

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 fire. Insurance proceeds were received which generated recapture. A new building was built one and a half years later.
B) A half-ton truck that belonged to a construction company was stolen in 20x0. Insurance proceeds were received which generated recapture. The truck was replaced in 20x1.
C) A customized half-ton truck that belonged to a construction company was sold in 20x0. The proceeds from the sale generated recapture. A new customized truck was purchased fourteen months later in order to carry out the duties of a large contract awarded to the company.
D) A building that was used for income earning purposes was sold in December 20x0. The proceeds from the sale generated recapture. A new building was purchased in April 20x1. The company's fiscal year-end is December 31^st.