QUESTION 1 (12 marks)
Fast Ed is the owner of a new and second hand car business. He is really good at
wheeling and dealing in the car selling business but is not very good at
understanding the tax effect of some of his deals. Explain the tax effect of the
following activities. (Each subsection is worth 3 marks.)
a) Fast Ed has several different cars in stock at year-end and is not sure how to
value them or if he has different valuation options available. Explain in your
own words the options Fast Ed has available to value his stock.
b) Fast Ed gave Slick Sam, a creditor, a car, which was in stock. The car was
given in exchange for a debt of $18,000 Fast Ed owed to Slick Sam. The car
cost Fast Ed $17,000 and was on the showroom floor for sale for $19,000.
c) Fast Ed really liked one of the cars that were traded in. He took it home for
his daughter who now uses it everyday. He decides he is not going to sell this
car and keep it for use in the family. He purchased the car for $19,000 and it
could have been sold for $21,000
d) Fast Ed decided to put some of the Ford hatchbacks on sale for only $18,000.
Ford had just announced a new model hatchback and it has great reviews.
He was really concerned that customers would not consider buying the older
models if he did not drastically reduce the selling price. Other dealers have
told him they were ‘not moving’. The Ford hatchback had cost $22,000 and
was originally selling for $28,000. At the 30 June Fast Ed had 3 in stock.
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