Sheila Stekylo is the sole shareholder of Eastern Smallwares Ltd., a Canadian-controlled private corporation based in southwestern Ontario. The company wholesales small wares to retail variety stores in eastern Canada. Two years ago, ESL purchased 40% of the common shares of Byron Products Ltd., a company in a similar line of business but operating in western Canada. The remaining 60% of BPL€™s shares are owned by Ranjit Dhillon.
Dhillon is actively involved in managing BPL€™s operations. It is two months before ESL€™s year end and Stekylo has completed a review of the company€™s financial information. ESL€™s operating results, to date, are good. The company€™s internal accountant has prepared projections to the end of the year (see Exhibit I). Stekylo notices that the projections do not include an estimate of the current year€™s taxes and tells her internal accountant the following:
€œWe need an estimate of the current year€™s tax cost for ESL so we can properly plan our cash flows. Also, there are a lot of planned activities that you and I have discussed that are going to have tax consequences and may require some planning. Also, some changes are happening at BPL. For example, BPL has taken out a $200,000 life insurance policy on both me and Dhillon as part of the buy/sell agreement, and I have no idea what the tax implications are if BPL collects on that insurance. And Dhillon is talking about acquiring a separate business in his own name. Prepare as much information as you can, and send it over to our accountants at Carlson and Kominsky (C&K). Have them estimate this year€™s tax cost for ESL, and then have them explain to us the tax implications of the various planned events and make any planning suggestions.€
As a member of C&K, you have been assigned to report to Stekylo. You intend to prepare a preliminary draft report for review based on the information provided in Exhibits I, II, and III. Your report will include an estimate of ESL€™s net income for tax purposes, taxable income, and tax cost for the current year.
Required:
Prepare the preliminary draft report for Stekylo.

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EXHIBITI EASTERN SMALLWARES LTD Projected Year-End Statement of Income with Supplementary Notes Sales Cost of sales $1,333,000 Gross profit 643,000 Expenses Salaries and wages Rent and utilities Repairs and maintenance Amortization Travel and delivery Interest Insurance Reserve for doubtful debts Advertising Chartable donations Legal and accounting Other $320,000 24,000 23,000 8,000 17,000 26,000 7,000 37,000 11,000 5,000 20,000 IV*30,000 Income from operations Other income Interest on bonds Dividends from taxable Canadian public corporations Gain on sale of marketable securities Net gain on land sales 35,000 8,000 40,000 15.000 Net income before tax