Question

Company C was acquired by Company D on July 1 of the current year. Both companies operate in the same line of business and Company D will continue to operate Company C in the future. At the time of the acquisition of control, Company C held the following selected assets:

• land with an adjusted cost base of $200,000 and a fair market value (FMV) of $150,000
• Class 50 depreciable assets with a capital cost of $400,000, an undepreciated capital cost (UCC) of $275,000, and an FMV of $225,000
Based on the information provided, which one of the following statements is true regarding the impact of the acquisition of control on Company C's losses that are available for future use?
a) They will increase by $50,000.
b) They will increase by $75,000.
c) They will increase by $100,000.
d) They will not change.

Answer 1

The acquisition of control by Company D will decrease Company C's losses available for future use by $50,000.

Step-by-step explanation:

The acquisition of control by Company D on Company C will result in a decrease in Company C's losses available for future use.

This is because the adjusted cost base of the land is greater than its fair market value, resulting in a deemed disposition and a capital loss of $50,000 ($200,000 - $150,000).

Since the capital cost of the depreciable assets is greater than their fair market value, Company C can claim a terminal loss of $100,000 ($400,000 - $225,000) when they are eventually disposed of.

Therefore, the total losses available for future use will increase by $50,000 ($50,000 capital loss from the land - $100,000 terminal loss from the depreciable assets).