Chapters 7 & 8 solutions

Chapters 7 & 8 solutions - CHAPTER SEVEN SOLUTIONS Solution...

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CHAPTER SEVEN SOLUTIONS Solution to Assignment Problem Seven - 1 As the equipment purchased in 2006 is for manufacturing and processing, it would be allocated to Class 43. This declining balance class is subject to a 30 percent rate. The maximum CCA would be calculated as follows: Capital Cost Of Assets $500,000 Previous Year’s CCA (Less Than Maximum Of $75,000) ( 50,000) Balance - Beginning Of Current Year $450,000 Capital Grant ( 40,000) Proceeds Of Disposition (Note) ( 230,000) Balance Before CCA $180,000 Maximum CCA At 30% ( 54,000) January 1, 2008 UCC Balance $126,000 Note The capital cost of the equipment sold is $230,000 [(1/2)($500,000 - $40,000)]. The $45,000 ($275,000 - $230,000) amount of proceeds in excess of the capital cost would be treated as a capital gain, rather than as a deduction from the UCC of the class.
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Solution to Assignment Problem Seven - 2 Part A The maximum CCA for each of the three years would be calculated as follows: Class 1 Class 8 2005 Additions $255,000 $2,800 One-Half Net Additions ( 127,500) ( 1,400) CCA Base $127,500 $1,400 Maximum CCA: [(4%)($127,500)] ( 5,100) [(20%)($1,400)] ( 280) Add: One-Half Net Additions 127,500 1,400 January 1, 2006 UCC $249,900 $2,520 Opening 2006 UCC $249,900 $2,520 Disposition - Lesser Of: Proceeds Of $3,200 Cost Of $2,800 ( 2,800) Maximum CCA At 4 Percent ( 9,996) Recapture Of CCA 280 January 1, 2007 UCC $239,904 Nil Opening 2007 UCC $239,904 Dispositions - Lesser Of: Deemed Proceeds Of $105,000 [(1/3)($315,000)] Cost Of $85,000 [(1/3)($255,000)] ( 85,000) Balance For CCA Determination $154,904 Maximum CCA is Lesser Of: $6,196 [(4%)($154,904)] Net Rental Income Before CCA Of $5,300 ( 5,300) January 1, 2008 UCC $149,604 The disposition of the Class 8 assets for more than their capital cost would create recapture and a taxable capital gain of $200 [(1/2)($3,200 - $2,800)]. In 2005 and 2006, his rental income before CCA is greater than his maximum CCA and, as a consequence, he can deduct maximum CCA for these years. In 2007, his rental income of $5,300 limits the amount of CCA that can be deducted, as the deduction of CCA cannot be used to create or increase a loss on a rental property. Part B Mr. Taylor’s decision to occupy one-third of his rental property represents a change in use that will be considered a deemed disposition of one-third of the property at fair market value. This will result in a taxable capital gain that can be calculated as follows: Building Land Deemed Proceeds (One-Third Of Market Values) $105,000 $40,000 Adjusted Cost Base (One-Third Of The Original Cost Of Building And Land) ( 85,000) ( 30,000) Capital Gain $ 20,000 $10,000 Inclusion Rate 1/2 1/2 Taxable Capital Gain $ 10,000 $ 5,000
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provided no CCA is claimed. However, as Mr. Taylor claimed CCA on the unit he has moved into, he cannot make this election. This election is covered in Chapter 10 .
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This note was uploaded on 06/17/2008 for the course ACCT 321 taught by Professor Smith during the Spring '08 term at University of Calgary.

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Chapters 7 & 8 solutions - CHAPTER SEVEN SOLUTIONS Solution...

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