XYZ Corporation has decided to sell one of its windmills for $5 million. This bu
ID: 1171314 • Letter: X
Question
XYZ Corporation has decided to sell one of its windmills for $5 million. This building is part of the Class 3 (5 percent) CCA pool, and XYZ had it built five years ago at cost of $4.5 million. XYZ's tax rate is 25%. Zebra uses 12% as its cost of capital.
a. If the Class 3 UCC at the start of the year in question was $12 million (and this was the only disposal), what would be the tax consequence of the sale of windmill? (Do not round your intermediate calculations. Round your final answer to the nearest whole number).
Present value of tax __________
b. If the Class 3 UCC at the start of the year of the sale was $4 million, what would be the tax effect of the sale? (Do not round your intermediate calculations. Round your final answer to the nearest whole number).
Tax effect_____________
c. If the UCC at start of the year was $6 million and this was the last windmill in the pool, what would be the tax effects? (Do not round your intermediate calculations. Round your final answer to the nearest whole number).
Tax effect_____________
Explanation / Answer
and $0.50 millionwould be taxable as capital gain (5-4.50).
This will lead to increase in tax
Windmills $5 million Depreciation Rate 5% Life 5 Yrs Tax rate 25% Cost of capital 12% Original Cost $ 5 million A) If the class 3 UCC at the start of the year in question was $12 million(and this was the only disposal), what would be the tax consequences of the sale of windmill Class No UCC at the beginning of year Costs of additions during year Adj Lessor of costs or Proceeds from disposals during year UCC Additions Minus disposals divide by 2 Reduced UCC Rate % Prorated in number of days Capital Cost allowance UCC at end of year 3 12 4.5 7.5 0 5% 0.375 7.125 Since only part of asset is sold in the class there would be capital gain calculation for this diposal The cost of windmill was $4.50 million and the sell price is $ 5 million than there would be capital gain of (5-4.5) = $ 0.50 million The tax is calculated on 50% of capital gain which is $0.50/2 = $0.25 million Tax on $0.25 million @ 25% 0.25*25% 0.0625 The above tax will be payable at the end of the year when return is filed The present value of tax would be $0.0625 million * (1/1.12) The present value of tax would be $ 0.055804 million or $ 55803.57 B) If the Class 3 UCC at the start of the year of the sale was $4 million, what would be the tax effect of the sale? (Do not round your intermediate calculations. Round your final answer to the nearest whole number). Class No UCC at the beginning of year Costs of additions during year Adj Lessor of costs or Proceeds from disposals during year UCC Additions Minus disposals divide by 2 Reduced UCC Rate % Prorated in number of days Capital Cost allowance UCC at end of year 3 4 4.5 -0.5 0 5% Since the UCC is negative due to disposal of asset it means there is recapture income So $0.50 million would be taxable as business incomeand $0.50 millionwould be taxable as capital gain (5-4.50).
This will lead to increase in tax
C) f the UCC at start of the year was $6 million and this was the last windmill in the pool, what would be the tax effects? Class No UCC at the beginning of year Costs of additions during year Adj Lessor of costs or Proceeds from disposals during year UCC Additions Minus disposals divide by 2 Reduced UCC Rate % Prorated in number of days Capital Cost allowance UCC at end of year 3 6 4.5 1.5 0 5% Since this is the only windmill in the pool the there would be Terminal Loss after disposal of asset Terminal Loss = $6 million - $ 4.50 million = $ 1.50 million The above terminal loss can be claimed as expense for arriving at business income. This will lead to reduction in taxRelated Questions
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