In late 20X0, Conrad Petry retired from his job of 30 years and began receiving a pension of $4,000 per month. Unable to cope with full retirement, he purchased a small retail business on January 1, 20X1. At that time, he moved into rented premises under a seven-year lease that included an option to renew for another three years. He immediately spent $12,000 to improve the premises. The business incurred a small loss in 20X1, but 20X2 was profitable. Information relating to the 20X2 business activity is provided below.
In addition, in 20X2, Petry disposed of an investment that he had owned for several years: shares of a small business corporation. He sold the shares, which originally had cost $20,000, for $12,000.
Additional information concerning retail business (20X2)
1. The financial statements indicate a profit of $9,500 for the year ended December 20X2.
2. During the year, Petry withdrew $1,000 each month from the business for personal use. However, in order to reflect the proper economic costs of the business, he insisted that the accountant deduct a fair salary for his own efforts in the business. Accordingly, salary expense was increased by $38,000, and Petry’s equity was credited with an equal amount.
3. The profit includes a deduction for amortization/depreciation of $3,500.
4. On February 28, 20X2, additional improvements costing $18,000 were made to the leased premises. This amount appears on the balance sheet as a fixed asset.
5. On June 30, 20X2, Petry purchased the land beside the leased premises. This land is to provide extra parking space for customers but can also be used to build a company-owned store building when the current lease expires. The costs relating to the land totalled $58,200, determined as follows:
Land price ……………………………………………………. $40,000
Cost of paving parking area …………………………………. 12,000
Permanent landscaping costs paid……………………………. 4,000
Legal fees to prepare purchase agreement …………………….. 1,000
Legal and registration fees for first mortgage financing of the land… 1,200
…………………………………………………………….. $58,200
The land and the paving of the parking lot are recorded as fixed assets. The other costs have been deducted as 20X2 expenses.
6. In January 20X2, Petry purchased an automobile for $34,000 plus HST. All of the operating expenses (gas, oil, repairs, insurance, and so on) of $4,300 were paid by the business and included in travel costs. No amortization/depreciation was deducted. The car was used for the following purposes:
Travel to and from work…………………….. 20%
Travel to Vancouver to see suppliers………… 25%
Personal travel………………………….. 55%
……………………………………………. 100%
7. Sales revenue has been reduced by $10,000 for a reserve for anticipated post-Christmas returns.
Required:
Determine Petry’s net income from business and his overall net income for tax purposes for the 20X2 taxation year.