Question

Maggie bought a house which was quite a dump in 1989 for $75,000. She fixed it up with paint and wallpaper but in 1996 she did a major renovation which cost $50,000. In 1993, she bought a dump of a cottage for $35,000 because it was both on a lake and near some good cross-country ski trails. She winterized it immediately for $10,000. Over time, the dumpy cottage has become quite attractive with the addition of a new roof, siding, windows and doors all of which cost $15,000 in 1995. In addition, she is fond of landscaping and has created quite a beautiful garden. I might add that Maggie has only $40,000 in RRSPs since she prefers to sink her money into her living space.

In July 2006, Maggie lost her job and received $60,000 in severance pay. She put as much as she could into her RRSP (included in the $40,000 above) and put the rest in GICs to help finance her plan. Maggie had been taking courses for several years to become a Master Gardener.

When she lost her job, she decided to live out her dream of having a gardening business where she would design gardens for others with cottages near her and maintain them if they needed it because they mostly come to their cottages on the weekend to relax. In the winter, she will keep the lanes clear (with her snow blower) and check up on the cottages now and again. She gave her corporate clothes to her friend Kate with the proviso that she could stay with her when she comes to the City (which won’t be often because she is very fed up).

When she lost her job, she immediately started renting out the house for $1,600 a month plus utilities. She still has to pay the $2,400 a year taxes and maintenance but figures the house will be her retirement fund. When she started renting out the house, it immediately ceased to be her principal residence – her cottage is now her principal residence. In July 2006, her house was worth $300,000 and the cottage is worth $140,000.

Questions:

a.     Maggie’s house increases in value at about 3% a year from 2006 and she sells it in 2017. How much is her taxable capital gain on the house ignoring real estate commissions?

b.    Maggie’s cottage also increases 3% a year in value. If she also sells it in 2017 in order to buy a bed and breakfast, how much is her taxable capital gain?

Answer 1

solution :

given that Rundle Freight Company owns a truck that cost $33,000.

also given that Currently, the truck’s book value is $27,000, and its expected remaining useful life is five years

mentioned in gi ven indormation that

Rundle has the opportunity to purchase for $28,000 a replacement truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $7,000 per year more than fuel cost for the new truck.

some other given information The old truck is paid for but, in spite of being in good condition, can be sold for only $16,000.

Calculating the total relevant costs:

	retaining truck	replacing truck
cost of the new truck	$-	$28000
additional fuel cost (5*7000)	$35000	$-
oppurtunity cost	$16000	$-
total cost	$51000	$28000

final decision of retaining old truck :

the purchase cost of ol;d truck and book value are irrelevant

they are sunk cost

therefore they should not be considered

the comparision cost of replacing and retaining truck are given above

from the above table

the company should replace the old truck as it would cost $28000 in replacement as against the cost of reraining truck of $51000