Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Ms. Shlemeel was the sole proprietor of a business that retailed specialty coffees. The business has a December 31 year-end. With the advice of her

Ms. Shlemeel was the sole proprietor of a business that retailed specialty coffees. The business has a December 31 year-end. With the advice of her lawyer, Mr. Shlemozzel, she proposes to transfer the assets of the business on January 2, 2021 to a newly incorporated company called Shlemeel Coffees Unlimited Ltd., the common shares of which are owned by her husband. This corporation has a December 31 year-end. Ms. Shlemeel has provided you with the following balance sheet and additional information concerning her proprietorship.

image text in transcribed

FMV = fair market value

Additional Information

1. Income for tax and financial accounting purposes have always been the same.

2. The proprietorship has developed goodwill that has a fair market value of $71,000.

3. Liabilities are to be assumed by the new corporation. In addition, Ms. Shlemeel wants to take, as consideration for the transfer of assets under subsection 85(1), the maximum (to the nearest multiple of $1,000) in notes payable by the corporation to permit the maximum deferral of taxation on the transfer. She wants the remainder of the maximum fair market value of consideration in voting preferred shares. The shares will be retractable with a legal stated capital equal to their fair market value and sufficient votes to control the corporation.

4. Koffee Kart Ltd. is an arm's length Canadian-controlled private corporation. All of the corporation's assets are used in an active business carried on in Canada. Ms. Shlemeel owns 15% of the shares of Koffee Kart Ltd.

Required:

Ms. Shlemeel has come to you, her accountant, for income tax advice on this proposed transaction.

(a) Identify, with a brief explanation, the business assets that:

(i) should not be transferred to the corporation at all, and

(ii) should be transferred to the corporation, but cannot or should not be transferred under a subsection 85(1) election and the amount and type of consideration that should be received for each asset.

(b) For the assets that should be transferred under a subsection 85(1) election to the corporation, indicate the maximum amount of debt (to the nearest multiple of $1,000) that can be taken. Also, indicate the amount of the shares that can be taken as consideration to defer all possible capital gains, losses and other income and to avoid other adverse tax consequences.

(c) Compute the adjusted cost base (ACB) of the consideration and the paid-up capital (PUC) for tax purposes of the shares received from the corporation on the transfer under a subsection 85(1) election.

Country-Canada

SHLEMEEL COFFEES BALANCE SHEET December 31, 2020 Current Assets Cash $15.000 $35.000 13,000 Accounts receivable Less: Reserve for doubtful debts Inventory (not real estate), at cost (FMV$40,000) Shares in Koffee Kart Ltd., at cost (FMV: $32,000) Prepaid rent 22.000 37,000 45,000 2.000 $121,000 60.000 65,000 Fixed assets Land, at cost (FMV: $210,000) Building, at cost (FMV: $180,000) Less: accumulated amortization Equipment, at cost (FMV: $49,000) Less: accumulated amortization Computer system, at cost (FMV: $12,000) Less: accumulated amortization Computer software, at cost (FMV: $4,000) Less: accumulated amortization $160,000 95,000 $100,000 54,000 $25,000 8,000 $6.000 46,000 17,000 6.000 $309.000 Current liabilities Accounts payable Current portion of mortgage $20.000 27,000 $47.000 Long-term debt Mortgage payable Less: current portion $115,000 27,000 88.000 $135,000 174,000 $309.000 Proprietor's equity

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Libby, Short

6th Edition

978-0071284714, 9780077300333, 71284710, 77300335, 978-0073526881

More Books

Students also viewed these Accounting questions

Question

Explain exothermic and endothermic reactions with examples

Answered: 1 week ago

Question

Write a short note on rancidity and corrosiveness.

Answered: 1 week ago