EPS Questions

1.
Joan Bullato, because of her great fondness for his music, has purchased the rights to one of
the songs written by John Clapton. She estimates that the royalties from the song will total about
$35,000 per year for the next few years. She has no plans to buy any additional song rights.
Explain whether the royalties she receives would be treated as business income or property
income. In addition, indicate how any gain or loss on a disposition of the rights would be taxed.
2. During 2020, Sandra Von Arb acquired a four-unit apartment building for $230,000. While it
was her intention to operate the building as a rental property, one month after her purchase she
received an unsolicited offer to purchase the building for $280,000. She accepts the offer. Should
the $50,000 be treated as a capital gain or as business income? Justify your conclusion.
3. On December 31, 2019, Norman's Flowers estimates that $16,000 of its ending Accounts
Receivable will be uncollectible. A reserve for this amount is deducted for tax purposes. During
the year ending December 31, 2020, $17,200 in bad accounts are written off. At December 31,
2020, estimated uncollectible accounts total $18,400. What is the 2020 Bad Debt Expense for
accounting purposes? By what amount will the 2020 net business income (for tax purposes) of
Norman's Flowers be increased or decreased by he preceding information with respect to bad
debts?
4. As an unincorporated business, Barbra's Graphic Design keeps its records on a cash basis.
During 2019, its first year of operation, the business has cash sales of $53,400. At the end of the
year, an additional $26,300 of revenues was receivable. Of the amounts received, $5,600 was for
services that will be delivered during 2020. Barbra estimates that $425 of the end of year
receivable amounts will be uncollectible. By what amount will the 2019 net business income of
Barbra's Graphic Design be increased by the preceding information?
5. During November 2020, Martine's Jewels Ltd. sells a necklace for $120,000. The cost of this
necklace was $55,000, resulting in a gross profit of $65,000. The $120,000 sales price is to be
paid in four equal annual instalments on December 31 in each of the years 2021 through 2024.
Martine's Jewels Ltd. has a December 31 year end. Indicate the amount of the reserve that can be
deducted, and the net business income, for each of the years 2020 through 2024.
7. During the current year, Jobul Krist has the following costs:
Utilities $2,400
Maintenance And Repairs 4,600
Property Taxes 5,200
House Insurance 2,300
Interest On Mortgage 7,800
Repainting And Rewiring The Work Space In The Home 1,000
Home Internet Service Fees 960
Home Telephone: Monthly Charge 600
Employment/Business Related Long Distance Charges 390
Mr. Krist is a workaholic with no family, friends, pets, or personal interests. He estimates that he
uses 25 percent of his residence and 95 percent of his home phone and home internet service for
employment/business related purposes. Maximum CCA on 100 percent of the house would be
$12,000. Determine the maximum deduction that would be available to Mr. Krist assuming:
A. He iS an employee with $250,000 in income (no commissions).
B. He is an employee with $250,000 in commission income.
C. He is self-employed and earns $250,000 in business income.
8. On October 1, 2020, Ms. Vanessa Lord purchased an automobile to be used exclusively in her
newly formed unincorporated business that commenced operations on September 15, 2020. The
cost of the automobile was $45,000 before GST and PST. She finances a part of the purchase
price and, as a consequence, has financing charges for the period October 1 to December 31,
2020, of $1,200. In calculating her net business income for 2020, how much can Ms. Lord
deduct with respect to this acquisition? Ignore GST and PST considerations.
9. On August 1, 2020, Mr. Sadim Humiz leases an automobile to be used 100 percent of the time
in his unincorporated business. The lease cost is $985 per month. The manufacturer's suggested
list price for the automobile is $78,000. Mr. Humiz makes no down payment and no refundable
deposits. Determine his maximum deduction for lease payments for 2020. Ignore GST and PST
considerations.
10. Markit Ltd. signs a 10 year lease for an asset with an economic life of 11 years. The lease
payments are $23,000 per year. Compare the tax treatment of the lease with its treatment under
GAAP.
11. Brandon Works sells a single product that it buys from various manufacturers. It has
a December 31 year end. During 2020, purchases of this item were as follows:
Date Quantity Price
February 1 50,000 $2.50
May 23 35,000 2.85
August 18 62,000 2.95
October 28 84,000 3.05
On December 31, 2020, 102,000 of these items are on hand. Their replacement cost on this date
is $3.10 and they are being sold for $4.50. It is estimated that selling costs average 10 percent of
the sales price. It is not possible to identify the individual items being sold. Calculate all the
values that could be used for the 102,000 remaining units for tax purposes, identifying the
method you used for each value.
12. Mr. Morgan Gelato starts a business on March 1, 2020. Because it will be a slow time of year
for him, he intends to have a fiscal year that ends on June 30. During the period March 1, 2020,
through June 30, 2020, his business has income of $12,300. What amount of business income
will Mr. Gelato report in his personal tax return for the year ending December 31, 2020?

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