Question

Rover co. began operations two years ago (year 1) and recognized $37,000 in business income and $1,000 in taxable capital gains that year. last year (year 2) the company incurred a business loss of $25,000, a taxable capital gain of $2,000, and an allowable capital loss of $5,000. during the current year (year 3) business income was $50,000, taxable capital gains were $4,000, and the company received $10,000 in dividends from a taxable canadian corporation. rover co. utilizes any unused losses in the earliest years possible. which of the following taxable incomes are correct after all carry-over adjustments have been made?

a. Year 1: $13,000; Year 2: $0; Year 3: $61,000
b. Year 1: $12,000; Year 2: $0; Year 3: $52,000 O
c. Year 1: $38,000; Year 2: ($28,000); Year 3: $64,000

Answer 1

The correct taxable incomes after all carry-over adjustments have been made are: Year 1: $38,000; Year 2: ($18,000); Year 3: $64,000.

Step-by-step explanation:

To calculate the taxable income for each year, we need to consider the business income, taxable capital gains, allowable capital loss, and dividends. In year 1, the business income was $37,000 and the taxable capital gains were $1,000. Since there were no losses from the previous year, the taxable income for year 1 is $37,000 + $1,000 = $38,000.

In year 2, the business loss was $25,000, the taxable capital gain was $2,000, and the allowable capital loss was $5,000. Since the company utilizes any unused losses in the earliest years possible, the taxable income for year 2 is ($25,000 - $5,000) + $2,000 = ($20,000) + $2,000 = ($18,000).

In year 3, the business income was $50,000, the taxable capital gains were $4,000, and the company received $10,000 in dividends. Since there were no losses from the previous year, the taxable income for year 3 is $50,000 + $4,000 + $10,000 = $64,000.

Therefore, the correct taxable incomes after all carry-over adjustments have been made are:

Year 1: $38,000

Year 2: ($18,000)

Year 3: $64,000