chap15 - CHAPTER 15 Corporate Distributions, Windings-up...

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Unformatted text preview: CHAPTER 15 Corporate Distributions, Windings-up and Sales Problem 1 [ITA: 89(1)] Surplus Accounts Limited, a Canadian-controlled private corporation, whose fiscal year-end is December 31, provides you with the following data concerning its tax accounts and capital transactions for 2005. The balance in its capital dividend account was nil on January 1, 2005. Surplus Accounts Limited is considering winding up the corporation and wishes to determine the impact of the sale of all its capital assets on its tax surplus accounts. The following capital assets are recorded in the books of account: Assets Cost U.C.C./ C.E.C. Estimated proceeds Estimated selling costs Investments. ......... $ 60,000 $ 22,000 $ 500 Land. .................... 40,000 200,000 10,000 Building. .............. 70,000 $ 45,000 125,000 6,000 Equipment. .......... 35,000 Nil 8,000 400 Customer lists (Note 1). .............. 40,000 16,000 60,000 Additional Information (1) The balance in the cumulative eligible capital account reflects the purchase of the customer lists in 1995 for $40,000 less the tax write-offs for 1995 to 2004, inclusive. (2) In addition to the above assets, there is $35,000 of goodwill which will also be sold. REQUIRED Compute the effect on income and the capital dividend account balance immediately after the above transactions. 103 104 Introduction to Federal Income Taxation in Canada Solution 1 Effect on Income Investments: A.C.L. 1 / 2 ($22,000 ($60,000 + $500)). ........................................................... $ (19,250) Land: T.C.G. 1 / 2 ($200,000 ($40,000 + $10,000)). ............................................................... 75,000 Building: T.C.G. 1 / 2 ($125,000 ($70,000 + $6,000)). ............................................................ 24,500 Building: recapture ($45,000 $70,000). .................................................................................... 25,000 Equipment: recapture (($8,000 $400) nil). ............................................................................. 7,600 Eligible capital property: goodwill and customer lists: Proceeds ( 3 / 4 (60K + 35K)). ....................................................................... $ 71,250 Less: C.E.C. balance. ..................................................................................... 16,000 $ 55,250 Previous CECA claims (( 3 / 4 $40,000) $16,000). ..................................... 14,000 $ 41,250 Income ( 2 / 3 $41,250). ................................................................................. 27,500 Income (recapture of CECA). ........................................................................ 14,000 41,500 Income effect. .............................................................................................................................. $ 154,350 Capital Dividend Account Balance: January 1, 2005. ............................................................................................................ ....
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chap15 - CHAPTER 15 Corporate Distributions, Windings-up...

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