Exam 7: Income From Property

On January 1, 2020, John Traverse acquires 12,000 units of the RV Income Trust at a cost of $720,000. During 2020, the trust makes a distribution of $5.00 per unit. Of this total $1.50 is a return of capital while the remaining $3.50 is property income. John reinvests the total distribution in RV units at a cost of $55 per unit. What is the adjusted cost base of John's units on December 31, 2020?

On June 1, 2020, Mr. Michael Leiner acquires a newly issued debt instrument with a maturity value of $80,000. It matures on May 31, 2026 and pays interest at an annual rate of 7 percent. Payment for the first three and one-quarter years of interest is due on August 31, 2023, with interest for the remaining two and three-quarters years payable on the maturity date. What amount of interest will Mr. Leiner have to include in his tax returns for each of the years 2020 through 2026?

One conceptual approach to determining whether interest should be deductible is to limit deductibility to situations where this interest paid is related to the production of income that is fully taxable in the taxation year in which it is earned. List two situations in which interest would not be deductible under this conceptual approach.

On January 1, 2020, Leno Ltd. issues bonds for $770,000. The bonds have a maturity value of $800,000 and mature on December 31, 2022. The coupon rate on the bonds is 3 percent, with the interest paid annually on December of each year. The maturity amount is paid on December 31, 2022. What are the tax consequences related to this bond issue for Leno Ltd. in each of the years 2020 through 2022? How would these tax consequences differ from the information included in Leno's GAAP based financial statements? Leno Ltd. uses the straight-line method to amortize the discount on the bonds for accounting purposes.

How is the adjusted cost base of units in an income trust determined?

While of the following statements related to interest deductibility is correct?

On July 1, 2019, Janett Koenen acquired 1,000 shares of Techhab Inc. for $10 per share. The purchase was financed with a $10,000 bank loan, requiring annual interest payments of 5 percent. These shares were sold on December 1, 2019 for $6 per share, with the proceeds immediately invested in 500 Flexhub Ltd. shares at $12 per share. During 2020, the Flexhub shares pay eligible dividends of $0.50 per share. The bank loan was not repaid in 2019 and remains outstanding on December 31, 2020. On her 2020 tax return, Janett will report:

On January 1, 2020, Latkin Inc. issues bonds with a maturity value of $1,250,000 and a maturity date of December 31, 2025. The bonds pay interest on December 31 of each year at an annual coupon rate of 2 percent. They are sold for proceeds of $1,150,000 for an effective yield of 3.5 percent. The maturity amount is paid on December 31, 2025. What are the tax consequences related to this bond issue for Latkin Inc. in each of the years 2020 through 2025? How would these tax consequences differ from the information included in Latkin's GAAP based financial statements? Latkin Inc. uses the straight-line method to amortize the discount on the bonds for accounting purposes.

Interest on debt incurred to acquire equity securities is only deductible if the securities have a history of paying regular dividends.