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Grant MacEwan University - ACCT 328 Business Income 1)Jake Jones is the sole shareholder of Jones Enterprises? Ltd

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Grant MacEwan University - ACCT 328

Business Income

1)Jake Jones is the sole shareholder of Jones Enterprises? Ltd., a small retail shop selling widgets located in Vancouver?, Alberta. The shop has been in operation for several years. Jake provides you with the Statement of Income for the corporation for December 31 of the current? year:

Jones Enterprises Ltd.
Statement of Income
For the year ended December 31
Sales		$620,000
Cost of sales:	$45,000
Opening inventory	240,000
Purchases	285,000
Closing inventory	55,000	230,000
Gross profit		390,000
Expenses:
Accounting & legal (Note 2)	6,000
Advertising & promotion (Note 3)	6,000
Depreciation (Note 4)	24,000
Automobile expenses	5,000
Bad debts (Note 5)	5,000
Insurance (Note 6)	6,000
Interest	20,000
Office expenses (Note 7)	10,000
Rent	34,000
Wages & benefits (Note 8)	100,000	216,000
Net income for the year		$174,000

 

1.

Jones Enterprises Ltd. is a small business corporation operated by the sole? shareholder, Jake Jones.

2.

Accounting and legal include legal fees related to Jake?'s dispute in regards to a personal car? accident, in the amount of $ 1 comma 750.

3.

Advertising and promotion include? 'Meals and? Entertainment' costs in the amount of $ 3 comma 750.

4.

Information for Capital Cost Allowance? (CCA) purposes? - the Undepreciated Capital Cost? (UCC) at December 31 of the prior year was as? follows:

Class 8? (Office & General? Equipment)                $ 45 comma 150

Class 10? (Automotive Equipment)                                           $ 44 comma 850

5.

The company has set up an allowance for doubtful accounts based on a review of the Accounts Receivable at December 31 of the current year. This is a procedure that the proprietorship follows every year.

6.

Insurance includes life insurance premiums for Jake Jones in the amount of $ 2 comma 500. This life insurance policy is required as collateral for the business bank loan.

7.

Office expenses include the purchase of a? computer, on January 15 of the current? year, for $ 4 comma 250.

8.

Wages and benefits include the club? dues/membership fees paid to the Royal Oak Club in the amount of $ 6 comma 000. The club dues are paid for the five managers who take clients to the Royal Oak Club on a regular basis for business purposes.

Calculate the net business income for Jones Enterprises Ltd. for the current year.

Calculate the net business income for Jones Enterprises Ltd. for the current year.

 

2. Which of the following statements is true of? reserves?

Choose the correct answer.

A.

Only reserves that are specifically identified in the Income Tax Act can be deducted in computing net business income for tax purposes.

B.

Reserves apply only to calculating business income for tax purposes and are not deductible in computing GAAP income.

C.

Any reserve that can be deducted from GAAP income can also be deducted when computing business income for tax purposes.

D.

Reserves apply only to GAAP accounting and are not deductible in computing business income for tax purposes.

 

3. Generally? speaking, expenses that are deductible against net business income for tax purposes? ________.

Choose the correct answer.

A.

are highly? limited, and? therefore, rarely used

B.

are only those expenses specified within the Income Tax Act

C.

must be related to activities that are legal in nature

D.

must be incurred for the purpose of generating business income

 

 

4. A work space in the home deduction is available when the space in question? ________.

Choose the correct answer.

A.

is used occasionally to conduct business

B.

is an office or commercial building

C.

is used partially for the purpose of earning income

D.

is an? individual's principal place of business

 

5. When an existing company incurs expenses to issue new? shares, for tax? purposes, the expenses? ________.

Choose the correct answer.

A.

must be capitalized and deducted as CCA

B.

must be deducted over a period of 5 years

C.

are treated as an item of capital rather than expense

D.

are fully deductible in the year they are incurred

 

6. Under the provisions of the Income Tax? Act, only one half of the cost of business? ________ can be deducted against taxable business income.

Choose the correct answer.

A.

entertainment

B.

auto allowances

C.

interest

D.

political contributions

 

7. Which of the following amounts would NOT be considered a? "reasonable" deduction in accordance with ITA 67 and ITA? 61?

Choose the correct answer.

A.

A salary of ?$63 comma 000 paid to the business? owner's son for administrative? services, an unrelated administrative assistant would be paid a salary of ?$44 comma 000

B.

50?% of season hockey tickets used to entertain business clients

C.

50?% of business meal expenses

D.

A salary of ?$37 comma 000 paid to the business? owner's daughter for janitorial? services, an unrelated janitor would be paid a salary of ?$41 comma 000

8. _____ are deductible to determine GAAP income but are NOT deductible to calculate Net Income for Tax Purposes.

Choose the correct answer.

A.

The costs of entertaining a? company's customers

B.

Political contributions

C.

Automobile mileage payments to employees

D.

Luxury automobile costs

 

9. Which of the following is not allowed as a business deduction for income tax? purposes?

Choose the correct answer.

A.

Life insurance for a? proprietor, which is a required condition for the business bank loan

B.

Interest expense on a business bank loan

C.

Depreciation

D.

Capital Cost Allowance? (CCA)

 

10. If a Canadian property management company owns several apartment? complexes, the rents received from tenants would be considered? ________.

Choose the correct answer.

A.

employment income

B.

property income

C.

business income

D.

capital gains

 

 

 

11. For a CCPC that is eligible for a small business? deduction, ________? is/are effectively subject to a lower tax rate than the prevailing corporate rate.

Choose the correct answer.

A.

property income

B.

business AND property income

C.

dividend income

D.

business income

 

12. When a property that contains land and a building that is subject to CCA is disposed? of, ________.

Choose the correct answer.

A.

capital gains and terminal losses can be realized on the same sale

B.

terminal losses cannot be realized on the sale

C.

capital gains and terminal losses cannot be realized on the same sale

Your answer is correct.

D.

capital gains cannot be realized on the sale

 

13. Which of the following would be considered by the Canada Revenue Agency? (CRA) to be business income rather than property income or capital? gains?

Choose the correct answer.

A.

Profit from the sale of assets that were used to produce property income.

B.

Profit from the sale of securities held in an investment portfolio.

C.

Profit from the sale of inventory.

Your answer is correct.

D.

Profit from the sale of assets that were used to produce business income.

 

14. Sam is an individual taxpayer who is employed by a large retail company. Sam also works some nights and weekends as a contractor installing carpet for homeowners. The profit Sam earns from installing carpets is considered? ________.

Choose the correct answer.

A.

property income

B.

capital gain

C.

employment income

D.

business income

 

15. In determining whether an activity is a hobby or business? activity, which of the following considerations would be most important in making that? distinction?

Choose the correct answer.

A.

The number and frequency of similar transactions.

B.

The length of time the taxpayer has been conducting the transactions.

C.

The amount of time and effort the taxpayer expends to generate income.

D.

Whether the taxpayer conducted the activity with the expectation of earning a profit.

 

 

16. Which of the following is a disallowed business expense pursuant to Section 19 of the Income Tax? Act?

Choose the correct answer.

A.

Use of recreational facilities and dues

B.

Advertising expenses paid to foreign media and directed to the Canadian market

Your answer is correct.

C.

Political contributions to a federal political party

D.

Expenses incurred to earn income that is exempt from income tax

 

17. Which of the following is NOT an allowable business reserve in accordance with ITA? 12?

Choose the correct answer.

A.

Reserve for inventory impairment

Your answer is correct.

B.

Reserve for amounts? (accounts) receivable

C.

Reserve for undelivered goods or services

D.

Reserve for doubtful debts

 

18. RBG Company sells an asset and realizes a $ 130 comma 000 capital gain. Considering only this? transaction, the gain will result in GAAP income of? ________.

Choose the correct answer.

A.

$ 130 comma 000 and taxable income of $ 65 comma 000

Your answer is correct.B.

$ 130 comma 000 and taxable income of $ 130 comma 000

C.

$ 65 comma 000 and taxable income of $ 130 comma 000

D.

$ 65 comma 000 and taxable income of $ 65 comma 000

 

19. Which of the following transaction types will result in a permanent difference between GAAP income and net taxable income for a? corporation?

Choose the correct answer.

A.

expenses incurred for business meals

Your answer is correct.

B.

revenues received prior to the delivery of goods

C.

expenses incurred for office supplies

D.

estimated warranty costs

 

20. Under the? ITA, when computing net business income of a? corporation, ________.

Choose the correct answer.

A.

significantly more reserves may be deducted than are allowable under GAAP

Your answer is not correct.

B.

no reserves are? allowed, only actual? expenses/losses are allowed

C.

reserves that are allowable in computing GAAP income are also allowable in computing net business income

D.

only specifically identified reserves are allowed

 

21. When taxpayers engage in illegal? activities, ________.

Choose the correct answer.

A.

revenues from illegal activities must be included in a taxpayers? income, and related expenses are deductible from business income

Your answer is correct.

B.

the illegal activities are NOT considered a business and therefore revenues are NOT included in a? taxpayer's net income

C.

the illegal activities are NOT considered a business and therefore revenues must be included in the? taxpayer's income as property income

D.

revenues from illegal activities must be included in a taxpayers? income, but related expenses are deductible since they are considered illegal payments

 

22. CDX Company has a group of potential customers visit its office in Quebec. Management from CDX takes the customers out for dinner in the evening. The total bill for the meal is $ 310. How much of this expenditure is deductible for determining GAAP? income, and how much is deductible in determining Net Income for Tax? Purposes?

Choose the correct answer.

A.

$ 155 for? GAAP, $ 155 for Net Income for Tax Purposes

B.

$ 155 for? GAAP, $ 310 for Net Income for Tax Purposes

C.

$ 310 for? GAAP, $ 155 for Net Income for Tax Purposes

Your answer is correct.D.

$ 310 for? GAAP, $ 310 for Net Income for Tax Purposes

 

23. ?________ is NOT an allowable method of determining inventory cost for tax purposes.

Choose the correct answer.

A.

FIFO

Your answer is not correct.

B.

Specific identification

C.

LIFO

This is the correct answer.

D.

The retail method

 

24. When a company leases an? automobile, ________.

Choose the correct answer.

A.

the lease payments are fully deductible in computing Net Income for Tax Purposes

B.

the ITA limits the amount of the lease payments that are deductible

Your answer is correct.

C.

the ITA requires that the transaction be treated as a purchase of the auto if it is assumed the company will take ownership of the auto at the end of the lease

D.

the lease payments are deductible for GAAP but? non-deductible in determining Net Income for Tax Purposes

 

25. Jarod Harold is the sole shareholder of Harold Enterprises? Ltd., a small retail shop selling widgets located in Ottawa?, Alberta. The shop has been in operation for several years. Jarod provides you with the Statement of Income for the corporation for December 31 of the current? year:

Calculate the net business income for Harold Enterprises Ltd. for the current year.

Calculate the net business income for Harold Enterprises Ltd. for the current year.

 

26. If a corporation enters into a? long-term lease agreement on a particular? property, and intends to take ownership of the property at the end of the lease? term, how is the lease accounted for GAAP and tax? purposes?

Choose the correct answer.

A.

The lease will be accounted for as a lease for GAAP AND tax purposes.

B.

The lease will be accounted for as a purchase of the property for GAAP AND tax purposes.

C.

The lease will be accounted for as a lease for GAAP purposes and as a purchase of the property for tax purposes.

D.

The lease will be accounted for as a purchase of the property for GAAP purposes and as a lease for tax purposes.

 

27. In determining Net Income for Tax? Purposes, which of the following capital expenditures can be deducted entirely in the year of the? expenditure, rather than being recovered through? CCA?

Choose the correct answer.

A.

the purchase of certain manufacturing equipment specified within the ITA

B.

costs paid to landscape a? company's property

Your answer is correct.

C.

prepaid expenses

D.

purchases of passenger autos that are not considered? "luxury"

 

28. Which of the following is the MOST important criteria to determine whether an asset is capital or? non-capital in the hands of a? corporation?

Choose the correct answer.

A.

the total cost of the asset relative to other assets held by the corporation

B.

what the ordinary business operations of the corporation are

Your answer is correct.

C.

whether or not the estimated useful life of the asset is more than 1 year

D.

whether the asset is used by the corporation to produce business or property income

 

29. Consider the example of an automobile. In which of the following situations would the sale of an auto result in business? income?

Choose the correct answer.

A.

An auto dealership sells a new car from its inventory for more than the original purchase price to a manufacturing company. The car will be used as a company car for the? manufacturer's salesforce.

Your answer is correct.

B.

A manufacturing company sells a car that had been used for its traveling salesforce for a price greater than the original purchase price.

C.

An individual sells a car that had been used as a personal vehicle for more than he paid for it.

D.

A taxi company purchases a car that is used as a taxi cab and later sells the car for more than the original purchase price.

 

30. XYZ Company is a retail store whose only business operations are the sales of apparel. Which of the following asset transactions will result in a capital? loss?

Choose the correct answer.

A.

XYZ makes an investment in the shares of M? corp, which is a restaurant franchise. The shares are later sold for less than the original purchase price.

This is the correct answer.

B.

XYZ puts some seasonal apparel on clearance and sells a pair of shorts for less than the cost of the shorts.

C.

?XYZ's building catches fire and is destroyed. The insurer of the building gives XYZ less money for the claim than the original purchase price of the building.

D.

XYZ replaces its display fixtures with newer? fixtures, and sells the old fixtures to a smaller business for less than the XYZ originally paid for them.

 

31. Which of the following items would be added to a? corporation's GAAP income to determine Net Income for Tax? Purposes?

Choose the correct answer.

A.

terminal losses

B.

?50% of business meals and entertainment

Your answer is correct.

C.

CCA that exceeds GAAP amortization

D.

a federal income tax refund

 

32. ?________ are generally not favourable entities from a tax standpoint as they do not qualify for the small business deduction NOR general rate reduction.

Choose the correct answer.

A.

Management companies

B.

Personal services corporations

Your answer is correct.

C.

Large CCPCs

D.

Professional corporations

 

33. If a company has significant Net Income for Tax Purposes for the year and decides to purchase a significant amount of new depreciable? equipment, ________.

Choose the correct answer.

A.

the GAAP amortization taken on the equipment will be similar and there will most likely be no tax consequence to consider

B.

the purchase will likely create capital gains that will offset the value of any excess of CCA deductions that exceed GAAP amortization

C.

the CCA taken on the equipment will most likely exceed the GAAP? amortization, and create a favourable tax deduction

Your answer is correct.

D.

the GAAP amortization taken on the equipment will most likely exceed the CCA? deduction, and create an unfavourable tax deduction

 

 

 

34. Payments made by corporations to third parties at the discretion of the taxpayer are? ________.

Choose the correct answer.

A.

taxable to the taxpayer if they are? non-taxable to the third party

B.

taxable to the taxpayer if they are for the benefit of the taxpayer

This is the correct answer.

C.

taxable to the taxpayer if the third party is related to the taxpayer

D.

taxable to the taxpayer