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Taxation


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

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.

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