Coffee Co. began operations in 20x0 and recognized $37,000 in business income and $1,000 in taxable capital gains that year. In 20x1, the company incurred a business loss of $25,000, a taxable capital gain of $2,000, and an allowable capital loss of $5,000.
Business income for 20x2 was $50,000, taxable capital gains were $4,000, and the
Company received $10,000 in dividends from a taxable Canadian corporation. Coffee Co. utilizes any unused losses in the earliest years possible, Which of the following taxable incomes are correct after all carry-over adjustments have been made?
A)20x0: $38,000; 20x1: ($28,000); 20x2: $64,000
B)20x0: $12,000; 20x1: $0; 20x2: $52,000
C)20x0: $37,000; 20x1: $0; 20x2: $27,000
D)20x0: $13,000; 20x1: ($0; 20x2: $61,000

Question

Quizplus · Accepted Answer

In 20x0, the taxable income is $38,000 ($37,000 business income + $1,000 capital gains). In 20x1, the business loss of $25,000 offsets the business income, and the net capital loss of $3,000 ($5,000 loss - $2,000 gain) can be carried back to offset the 20x0 capital gain, reducing 20x0 taxable income to $12,000. In 20x2, the business income is $50,000, and the capital gains are $4,000. The $10,000 dividends are not taxable. The remaining $22,000 business loss from 20x1 is carried forward to 20x2, reducing taxable income to $52,000.

Coffee Co Began Operations in 20x0 and Recognized $37,000 in Business