Assignment 5, Real Estate Trading Services, UBC Sauder

Question 1

Question 1

A general partnership is formed between five businesspeople. All five partners contribute $85,000 to the partnership. If a client obtains a judgment against all five of the partners for $1,500,000, what is the maximum amount that any one partner could be liable to the client for?

1. $85,000
2. $50,000
3. $1,500,000
4. $200,000

Answer 1

Correct Answer: 3

Option (3) is correct because in a general partnership, each partner is jointly and severally liable for all debts and liabilities incurred, including payments beyond their initial commitment. This means that any one partner could end up being liable to the client up to a maximum of $1,500,000.

Options (1), (2), and (4) are therefore incorrect

Question 2

Question 2

According to the revenue recognition principle, which of the following would NOT be recognized as revenue?

1. A contractor provides a service and once the job is finished, the client pays their bill.
2. On the completion date of a property sale, funds are received from the purchaser of the property.
3. A tenant sends in a cheque for the next six months’ property management fees.
4. A licensee receives sales commission on the date the title is transferred to their client, as per the Agent contract.

Answer 2

Correct Answer: 3

Option (3) is correct because one cheque covering six months’ property management implies that for the months in advance, a service has not been rendered and so has not yet been earned, which is not in accordance with the revenue recognition principle.

**revenue should be recognized when earned, not necessarily when cash is received. **

Options (1), (2), and (4) are incorrect

Question 3

Question 3

Mackie’s Trucks Ltd. has a corporate tax rate of 15%. Mackie, the owner, has a personal tax rate of 30% and his wife, Lilou, has apersonal tax rate of 25%. If Mackie dies in 2021, leaving the shares of the company to Lilou, who takes over running thecompany in 20X2, what is the company’s tax rate for 2022?

1. 25%
2. 35%
3. 15%
4. 30%

Answer 3

Correct Answer: 3

Option (3) is correct because the company’s tax rate remains the same, no matter who owns the company. Corporate tax rates are not determined or affected by personal tax rates, so Mackie’s Trucks Ltd. will have a 15% tax rate in 2021 and in 2022.

Options (1), (2), and (4) are therefore incorrect

Question 4

The next three (3) questions are based on the following information:

Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.

What was the purchase price of the building and the land, respectively?

1. $340,000; $795,000
   2 $440,000; $695,000
2. $425,000; $710,000
3. There is insufficient information given to determine the cost of both the building and the land.

Answer 4

Correct Answer: 2

Option (2) is correct because the purchase price of the building is $440,000 and the purchase price of the land is $695,000. To determine the original purchase price of the building, the original estimated or economic life of 25 years must be used.

Annual Depreciation Expense =
Cost - Salvage Value (if any) / Estimated Remaining Life (in years)

Re-arranging this equation, we get:

Purchase price = Cost = (Annual Depreciation Expense × Estimated Economic Life) + Salvage Value
= ($17,000 × 25) + $15,000
= $440,000

The original purchase price of the building was $440,000. Therefore, the cost of the land is $695,000 ($1,135,000 – $440,000).
Options (1) and (3) are incorrect because they do not show the correct purchase prices of the building and the land. Option (4) is
incorrect because there is sufficient information available to determine these costs.