ACCT 2301 Financial Accounting

Review the following independent scenarios and answer the accompanying questions. Show all calculations for full marks.

Part A: During 2020, Mr. Franz Schlitz receives $23,500 in eligible dividends from Canadian public corporations. His income is such that this additional amount will be taxed at a 29 percent federal rate and a 14 percent provincial rate. On eligible dividends, the province has a dividend tax credit equal to 25 percent of the gross up. Determine the total federal and provincial tax that will be payable on these dividends and his after tax retention.

Part B: Frank’s Auto Body, an unincorporated business, keeps its records on a cash basis. During 2020, its first year of operation, the business has cash sales of $71,200. At the end of the year, an additional $22,450 of revenues was receivable. Of the amounts received, $7,100 was for services to be delivered during 2021. Frank estimates that $650 of the end-of-year receivable amounts will be uncollectible.

By what amount will the 2020 net business income of Frank’s Auto Body be increased by the preceding information?

Part C: On November 1, 2020, Ms. Sherry Boland leases an automobile to be used 100 percent of the time in her unincorporated business.  The lease cost is $862 per month, and a total of $1,724 was paid for the year.  The manufacturer’s suggested list price for the automobile is $53,000.  Ms. Boland makes no down payment and no refundable deposits.  Determine her maximum deduction for lease payments for 2020.  Ignore GST and PST considerations.

Question 3

Each of the following independent Cases involves the payment of interest and the issue of whether the interest will be deductible for tax purposes.

Case A - Thomas Sanjuan finances the acquisition of an income producing property. The cost of the property is $435,000 and Thomas finances 100 percent of the purchase. The investment proves successful, with the property being sold for $610,000. He uses the proceeds of the sale to acquire two properties with costs of $495,000 and $115,000 respectively. Explain how the original $435,000 proceeds from the loan can be allocated to the two properties.

Case B - Tamara Sherrell has a trading account which holds equity securities with a current fair market value of $1,500,000. She would like to purchase a new Bentley for $325,000. Her bank will finance her purchase with a $325,000 loan that requires interest to be paid at a rate of 8.3 percent. However, as her equity securities are in a margin account, she can use her margin balance to borrow the $325,000 at a rate of 3.25 percent. She chooses the latter approach.

During the year, she pays interest on this loan of $10,500. Also during the year, the securities in her trading account pay total dividends of $75,000. Can she deduct the $10,500 of interest against the dividend income generated by the securities in her trading account? Explain your conclusion.

Case C - Manuel Pettie takes out a mortgage on his house for $500,000 and immediately transfers the entire amount to his brokerage account to invest in publicly traded securities. Relying solely on company names that come to him in his dreams, he makes some very bad investment choices. As a result, after one year, his securities are worth only $240,000. Feeling very discouraged, he sells all of the securities and uses the proceeds to reduce the loan balance. He will not have the resources to pay off the remaining $260,000 until he receives $500,000 from his trust fund in 2 years. Is the interest on the mortgage deductible before he sells the shares? If so, does this change after he sells the shares? Explain your conclusion.

Case D - Bo Godina borrows $220,000 in order to purchase an income producing property for that same amount. The results from this investment are not promising and, as a result, he sells the investment for $150,000. He uses these funds to buy two properties. The first property costs $35,000, while the second costs $115,000. How will the $220,000 in borrowing be linked to the two properties?

Question 4 (9 marks)

Karl Kim disposed of the following assets in 2020, all of which were bought within the last nine years:

Required: Determine Karl’s net taxable capital gain for the year

Question 5 (9 marks)

Ms. Linda Udall owns 800 shares of Fordam Inc. that she acquired several years ago at $10 per share.  On April 30, 2020, she acquires an additional 200 shares at $12 per share.  On July 15, 2020, after Fordam releases unexpectedly bad second quarter results, Ms. Udall sells all 1,000 of her shares at $5 per share.  On August 1, 2020, she purchases 200 shares at $1 per share as she believes the market has overreacted to the bad news.  Ms. Udall is still holding the shares at the end of the year.  What are the tax consequences of these transactions?

Question 6

For the last two years, Margaret Lane has been interested in the shares of Garod Inc.  During the period, her transactions in these securities were as follows

Shares

Purchased (Sold) Per Share Value

January 2019 Purchase 300 $4.75

July 2019 Purchase 200 5.25

November 2019 Sale (250) 5.40

July 2020 Purchase 400 5.50

December 2020 Sale (150) 4.80

Determine Ms. Lane’s taxable capital gains (losses) for 2019 and 2020.

Question 7

Part A Mr. Jerry Haggard owns a house in Calgary, as well as a cottage in Canmore.  He purchased the house in 2006 for $186,000.  The cottage was purchased in 2009 for $105,000.  During December 2020, both properties are sold, the house for $263,000 and the cottage for $197,000.  He has lived in the Calgary house during the year but has spent his summers in the Canmore cottage.  Determine the minimum capital gain that he must report on the 2020 sale of the two properties.