Taxable Income
You have been asked to reconcile accounting income to Division B income for tax purposes and to compute taxable income for your client, Waterloo Industries Ltd. The income statement for the year ended December 31, 2019 is shown below:
Waterloo Industries Ltd.
Statement of Income
Year Ended December 31, 2019
Sales
$4,780,000
Cost of sales
3,560,000
Gross profit
$1,220,000
Expenses:
Selling
$ 395,000
General and administrative
305,000
Amortization
230,000
Interest on long-term debt
37,000
Other interest
55,000
$1,022,000
Other income:
Gain on sale of fixed asset
$ 1,900
Income from other investments
109,000
$ 110,900
Income before income taxes
$ 308,900
Income taxes:
Current
$ 93,000
Provision for future income taxes
4,500
$ 97,500
Net income
$ 211,400
During your review of the working paper file and last year’s tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items:
1. The December 31, 2019 finished goods inventory is stated net of a reserve for a possible decline in market value of $57,000.
2. Included in general and administrative expenses are the following transactions:
(a)
landscaping
$17,000
(b)
cost associated with the valuation of land
2,800
(c)
donations consisting of $63,000 to registered charities and $1,000 to registered political parties
64,000
(d)
premium for term life insurance policy on the president in which the company is the beneficiary and the policy is used as collateral for a bank operating line of credit
22,200
(e)
memberships in private clubs for senior executives
3,200
(f)
meals and entertainment with clients
12,000
(g)
cost of employee training seminar to teach employees about new provincial workplace safety laws
7,200
(h)
cost of seasonal holiday party to which all employees were invited
17,700
(i)
warranty provision (actual warranty costs: $18,000)
28,000
(j)
reserve for decline in value of marketable securities
13,000
(k)
accrued bonuses, paid July 30, 2020
30,000
3. Included in interest expense on long-term debt and other interest are the following transactions:
(a)
bond interest paid to November 30, 2019
bond interest accrued to December 31, 2019
$10,000
950
(b)
interest on deficient income tax instalments
interest on late municipal property taxes
1,200
500
4. Included in other income are the following transactions:
(a) sale of capital property
Cost
Proceeds
Truck (not class 10.1)
$ 80,000
$25,000
Class 1 NRB— (purchased Feb 2010)
956,183
650,000
Building Class 1
50,000
37,200
Patent limited life — Class 44*
160,000
50,000
Computer system hardware**
65,000
10,000
* This was the only asset in the class (Purchased 2016)
** No separate class used
(b) the gain on sale of fixed asset arose from the sale of an oil painting hung in the office of the Director of Taxation; the painting cost $18,000 in 2011 and was sold for $19,900
(c) income from other investments includes the receipt of a cash dividend of $7,500 from the subsidiary corporation
5. The company had the following balances in its tax accounts on January 1, 2019:
Class 1
$225,000
Class 1-NRB
Class 8
615,048
55,000
Class 10
354,000
Class 12
Nil
Class 44
78,750
6. The following purchases of assets were purchased also in February 2019.
office furniture
$ 1,000
computer system — hardware
55,000
— applications software
12,000
7. The balances in the following tax accounts on January 1, 2019 were:
charitable donations carry forward from 2015
$ 7,000
non-capital loss carry forward from 2016
97,000
net capital loss from 1999
1,800
Required:
Prepare the requested reconciliation and compute taxable income. List under the heading “Omitted”, with a very brief explanation why, any of the above items which were omitted from the reconciliation.
