AFM363 Lecture Notes - Lecture 8: Capital Cost Allowance

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lemonbeetle804

22 Aug 2019

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM363

Professor

Dan Rogozynski

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Document Summary

Capital property: in the act, capital property is separated into two general categories: Non-depreciable capital property: not defined in the act; it includes receivables and other capital property such as land, investments, and personal -use property. Since this property is not used up, it is not eligible for cca. Depreciable property: property where cca was or will be allowe d. since depreciable property is also treated as capital property, a capital gain may arise. Conversely, a capital loss is disallowed on the disposition of depreciable property because the decline in value is fully deducted through the cca system. Available-for-use rule: taxpayers may not start claiming capital cost allowance until the property has become available for use . As a result, the half -year rule applies to the asset in the year it becomes available, in most cases. Half-year rule: only half of th e cost of a new asset is available for cca in the first year.

Related Questions

You have obtained the following information:

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Revenue	(1)	645.5	606.5

Other income	(2)	15.6	14.4

Changes in inventories		3.8	(16.4)

Cost of materials		(334.1)	(286.8)

Employee benefits expense		(91.0)	(83.9)

Depreciation	(3)	(29.8)	(23.6)

Other expenses	(4)	(116.3)	(100.6)

Interest income, net	(5)	12.3	(20.9)

Profit before tax		106.0	130.5

Income tax expense		(44.4)	(47.7)

Profit for the year		61.6	82.8

STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Assets
Non-current assets
Intangible assets	(6)	47.8	40.5
Property, plant and equipment	(7)	124.5	102.5
		172.3	143.0
Current assets
Inventories	(8)	30.3	27.9
Trade receivables		73.1	50.3
Cash and cash equivalents		111.4	86.0
Total assets		387.1	307.2
Equity and liabilities
Equity		5.8	5.8
Share capital		15.3	15.3
Share premium		112.1	80.1
Retained earnings		133.2	101.2
Non-current liabilities
Provisions	(9)	160.1	121.4
Current liabilities
Trade payables		33.5	31.8
Tax		50.4	44.3
Other liabilities		9.9	8.5
Total equity and liabilities		387.1	307.2

Notes

(1) Revenue from business activities:

Revenue from business activities
	20X8 ($M)	20X7 ($M)
Vehicles	588.0	526.0
Parts and accessories	39.6	36.8
Other	17.9	43.7
	645.5	606.5

Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.

Average number of employees:


	20X8 (Draft)	20X7 (Actual)
Wage earners	484	499
Salaried employees	483	477
Apprentices and trainees	36	37
	1,003	1,013

Other expenses include costs for warranties, administration and distribution, maintenance and insurance.

Interest income, net:

	20X8 (Draft ($m)	20X7 (Actual $m)
Interest and similar income	16.8	25.1
Interest and similar expenses	(4.5)	(4.2)
	12.3	20.9

Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.

Property, plant and equipment:

	Land and Buildings	Equipment	Assets under construction	Total
	$m	$m	$m	$m
Cost
1 January 20X8	61.8	212.1	19.0	292.9
Additions	5.0	28.9	9.4	43.3
Disposals	0.0	(4.5)	0.0	(4.5)
Reclassification	3.0	8.9	(11.9)	0.0
31 December 20X8	69.8	245.4	16.5	331.7

Depreciation
Current year	1.9	18.4	0.0	20.3
Accumulated	28.7	178.5	0.0	207.2

Net book value
31 December 20X8	41.1	66.9	16.5	124.5
31 December 20X7	34.9	48.6	19.0	102.5

(8) Inventories comprise:


	20X8 (Draft $m)	20X7 (Draft $m)
Raw materials, consumables and supplies	8.3	7.3
Work-in-progress	6.8	4.8
Finished goods	15.2	15.8
	30.3	27.9

(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.

The following additional information is available:

(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).

(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.

(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.

(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.

(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.

1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.

N.B these are pointers are for this question:

Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.

Norton Forms Excel Problem (dont have the excel form)

Norton Forms is a Canadian controlled private corporationspecializing in designing and printing custom business forms. It isowned by Viola Norton. For the taxation year ended December 31,2018, Ms. Norton 's daughter, Linda, who works in the business, hascalculated a Net Income for Norton Forms of $576,183. Incalculating this figure, Linda used generally accepted accountingprinciples.

Linda has produced the following Income Statement for the yearended December 31, 2018:

Norton Forms Inc.

Income Statement?

Year ending December 31, 2018

Sales---$$ 7,578,903

Cost of Goods Sold ---$5,468,752

Gross Profit ---$2,110,151

Expenses

General and Admin ---$852,000

Amortization Expense ---$550,000

Interest ---$8,500-------------- Total $1,410,500

Operating Income -------------$699,651

Other Income:

Loss on Disposal of Intangible Assets ---$ (17,000)

Interest Income?---$110,532

Income before income taxes ---$793,183

Income Taxes

Current ---$182,000

Future---$ 35,000 -----------Total $217,000

Net Income ------------------ Total $576,183

During your review of Linda's work and last year's tax returnfor the corporation, you have made the following notes:

1. In theaccounting records, the Allowance for Doubtful Accounts was $25,000at December 31, 2018, and $20,000 at December 31, 2017.

During 2018, the company had actual write-offs of $11,750. As aresult, the accounting Bad Debt Expense was $16,750. This amount isincluded in General and Admin expenses on the Income statement.

2. A reviewof the listing of receivables (for tax purposes), indicates thatthe actual items that may be uncollectible total $15,000 atDecember 31, 2018. In 2017, the company deducted a reserve for baddebits of $13,000 for tax purposes.

3. Generaland Admin Expenses include:

a) Donations to registeredcharities $27,000

b) Accrued Bonuses - Accrued Sept 1, 2018. Paid June 15,2019 $78,000

Meals and entertainment costs:

c) $1,000 per month for premium membership at golf club forViola $12,000

d) $200 per month for membership at golf club forsalespeople $2,400

e) Meals while entertaining clients $32,000

f) Food costs for Viola's personal chef for her meals athome $5,000

g) Annual summer BBQ for all staff $6,000

h) Sponsorship of local baseball team where company name isprominently displayed on front of jersey $15,000

i) Advertising in a US trade magazine directed at USclients $ 100,000

j) New software purchased October 1, 2018. ($13,000 forapplications and $25,000 for systems) $38,000

k) Accounting and legal fees for amended to the articles ofincorporation $6,000

l) Costs to attend annual convention of finger knitters inThailand. While at the convention, Viola was sure to hand outbusiness cards and talk to other attendees about her business withthe intention of claiming the convention as a businessexpense. $17,000

4. Interest expense consists of the following:

a) Interest expense - operations $ 5,000

b) Penalty and interest for late and insufficient instalmentpayments $ 2,000

c) Interest on late payment of municipal property taxes$1,500

5. Travel costs (included in general and admin expenses) includeboth air travel and travel reimbursement to employees for businesstravel. The company policy is to reimburse employees $0.58 perkilometer for the business use of their automobiles. During theyear, seven employees each drove 4,000 on employment relatedactivities and one employee drove 7,500 kilometers. None of thekilometer based allowances are required to be included in theincome of the employees.

6. Maximum CCA has always been taken on all assets. Theundepreciated capital cost balances at January 1, 2018 were asfollows:

Class 1 (4%)------$650,000

Class 8-----------$95,000

Class 10.1------$17,850

Class 14-----$68,000

Class 14.1-----$18,098

Class 53-----$135,000

Class 44-----$65,000

7. There was a loss on disposal of a limited life license toproduce copyrighted materials for a major distributor. This licenseoriginally cost the company $95,000, and it was sold for $63,000 in2018. The book value of the license at the time of sale was$80,000. When the license was sold, it was the only asset in itsCCA class. The loss was claimed as a loss on disposal of intangibleassets on the Income Statement.

8- Purchases and sales of equipment and other capital assetsmade during 2018 were as follows. (Note: any items discussed inother sections are included in this list as well)

A)The company purchased land and constructed a new building onit during the year. The building was used 95% for manufacturing andprocessing. The cost of the land was $350,000, and the buildingcost $475,000 to construct.

B)The company purchased a new set of furniture for the receptionarea for $1,200.

C)Some outdated desks used by the finance department with a costof $5,000 were sold for proceeds of $3,500.

D)Landscaping of grounds around the new building cost $35,000.This amount was capitalized for accounting purposes.

E)A company car for use by the president of the company waspurchased for $90,000. This car replaced the only other existingcompany car, which was purchased in 2013 for $95,000. The old carwas sold for $60,000.

F)A fence around the new building cost $52,000.

G)New software was purchased: $13,000 for Applications and$25,000 for Systems.

9- The company sold some shares that had been purchased severalyears ago. The capital gain on these shares was $152,708. Lindadidn't know how to account for this, so she credited the entireamount to retained earnings.

Required:

Determine Norton Forms' minimum Net Income for Tax Purposes forthe year ending December 31, 2018. Ignore GST/HST/PSTimplications.

Using Excel spreadsheet, indicate your rationale for thetreatment of all information given. (dont have the excel, dont knowhow to submit)

ambergiraffe255

Short Story:
What We Hope to Accomplish

Charlie Munger, Berkshireâs Vice Chairman and my partner, and I expect Berkshireâs normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well. Itâs our job, though, to over time deliver significant growth, bumpy or not.

After all, as stewards of your capital, Berkshire directors have opted to retain all earnings. Indeed, in both 2015 and 2016 Berkshire ranked first among American businesses in the dollar volume of earnings retained, in each year reinvesting many billions of dollars more than did the runner-up. Those reinvested dollars must earn their keep.

Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves.Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, itâs imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.

That wreck was followed by three key happenings â two positive, one negative â that set us firmly on our present course. At the beginning of 1996, we acquired the half of GEICO we didnât already own, a cash transaction that changed our holding from a portfolio investment into a wholly-owned operating business. GEICO. Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock â a boatload of stock â to buy General Reinsurance in late 1998.

After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. Early in 2000, I atoned for that folly by buying 76% (since grown to 90%) of MidAmerican Energy. The MidAmerican cash purchase â I was learning â firmly launched us on our present course of (1) continuing to build our insurance operation; (2) energetically acquiring large and diversified non-insurance businesses and (3) largely making our deals from internally-generated cash. (Today, I would rather prep for a colonoscopy than issue Berkshire shares.)

Our portfolio of bonds and stocks, de-emphasized though it is, has continued in the post-1998 period to grow and to deliver us hefty capital gains, interest, and dividends. Those portfolio earnings have provided us major help in financing the purchase of businesses. Though unconventional, Berkshireâs two-pronged approach to capital allocation gives us a real edge.

Our expectation is that investment gains will continue to be substantial â though totally random as to timing â and that these will supply significant funds for business purchases. Concurrently, Berkshireâs superb corps of operating CEOs will focus on increasing earnings at the individual businesses they manage, sometimes helping them to grow by making bolt-on acquisitions. By our avoiding the issuance of Berkshire stock, any improvement in earnings will translate into equivalent per-share gains.

Our efforts to materially increase the normalized earnings of Berkshire will be aided â as they have been throughout our managerial tenure â by Americaâs economic dynamism. One word sums up our countryâs achievements: miraculous. From a standing start 240 years ago â a span of time less than triple my days on earth â Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers

Question:
Explain what Buffett means by ânormalized earnings.â

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AFM363 Lecture Notes - Lecture 8: Capital Cost Allowance

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