The questions below are based on the following information:
BMP Products Ltd. (BMP)has been in operation for more than 20 years. Ten years ago, planning for future growth of its manufacturing facilities, BMP purchased a plot of land in an industrial area for $150,000. During the last couple of years, BMP has not met expectations. Business has fallen slightly and cash flows are tight. Due to the decrease in product demand, management does not believe that BMP will use this plot of land in the near future. As a result, during the taxation year ended March 31, 2020, BMP sold this land for $400,000. $150,000 was received in February, 2020, with the remainder to be paid in two equal instalments in February, 2021 and February, 2022. You have been advised that capital gains treatment is appropriate for this transaction.
-BMP can claim a reserve on the above sale at March 31, 2020 of:

Question

Quizplus · Accepted Answer

According to the information given, BMP sold the plot of land for $400,000 but only received $150,000 in February 2020, with the remainder to be paid in two equal installments in February 2021 and February 2022. The reserve that can be claimed is calculated based on the installment payments BMP expects to receive in the future. As BMP received $150,000 in 2020, the remaining amount to be received is $400,000 - $150,000 = $250,000. Since the two equal installments are due in 2021 and 2022, respectively, the reserve that BMP can claim is $250,000/2 = $125,000 per year. Therefore, the total reserve that BMP can claim at March 31, 2020, is $125,000 x 1 year = $125,000. However, the reserve amount that can be claimed for tax purposes is limited to the lower of 50% of the capital gain or the reserve calculated above. The capital gain in this case is ($400,000 - $150,000) - ($150,000 + $125,000) = $25,000. 50% of this capital gain is $12,500, which is less than the reserve calculated above. Therefore, BMP can claim a reserve of $12,500 for the taxation year ended March 31, 2020.

Note: The answer choices in the question do not include the correct amount of $12,500, but answer B is the closest option.

The Questions Below Are Based on the Following Information