For the year ending December 31, 2016, the Income Statement of Saratoga Springs Company was prepared in accordance with generally accepted accounting principles. There are a number of items that the bookkeeper needs assistance with following preparation of the financial statements before preparing the tax return.

Items for consideration:

1. The Company spent $6,000 during the year on landscaping for its new building. For accounting purposes this was treated as an asset. The Company will not amortize this balance as it believes the work has an unlimited life.

2. Selling and Administrative Costs include $15,000 in business meals and entertainment.

3. Other Expenses include contributions to registered charities of $3,700.

4. As the Company expects to issue more shares during 2017, it made a number of amendments to its articles of incorporation and included the legal costs in Other Expenses. These costs totalled $6,000.

5. The increase in the reserve for warranties during the year was $14,500. This amount is based on a self-insurance warranty program.

6. The Allowance for Doubtful Accounts in the accounting records was $17,000 at December 31, 2016, and $13,000 at December 31, 2015. During 2016 the company had actual write-offs of $12,250. As a result the accounting Bad Debt Expense was $16,250. This amount is included in Selling and Administrative Costs on the Income Statement. During the yearend review of the receivables ledger (for tax purposes), it was decided that the actual items that may be uncollectible total $10,000 at December 31, 2016. In 2015 the company deducted a reserve for bad debts of $13,000 for tax purposes.

7. Selling and Administrative Costs include membership fees for several employees in a local golf and country club. These fees total $3,400.

8. The President’s 8 year old daughter is very popular with her peers at her school, she was paid a monthly fee of $2,000 ($24,000 for the year) to promote Saratoga Springs Company to the students at school. This fee was deducted in the accounting records.

9. On January 1, 2016, the Company had the following UCC balances:

Class 1………………………………..$400,000

Class 8…………………………………575,000

Class 10…………………………………45,000

The Class 1 balance relates to a single building acquired in 2001 at a cost of $550,000. It is estimated that the value of the land at this time was $50,000. On March 1, 2016, this building is sold for $612,000. It is estimated that the value of the land is unchanged at $50,000. In the accounting records, this real property was carried at $507,000, $457,000 for the building and $50,000 for the land. The resulting gain on the building is included in the accounting revenues.

The old building is replaced on March 15, 2016 with a new building acquired at a cost of $673,000 of which $60,000 is allocated to land. The Company chose not to put the new building into a separate Class 1 so it does not qualify for the 6 percent CCA rate. No elections are made with respect to the replacement of the building. There are no dispositions of Class 8 assets during the year. However, there are acquisitions in the total amount of $126,000.

As the Company has decided to lease all of its vehicles in the future, all of the assets in Class 10 are sold during the year. The capital cost o000f these assets was $93,000 and the proceeds of disposition amounted to $37,000. The net book value of these assets was $52,000 and the resulting accounting loss of $15,000 was included in Other Expenses.

10.Other Expenses includes interest on late income tax installments of $500 and on late municipal tax payments of $275.

11.Saratoga Ltd. deducts maximum CCA.

December 31, 2016 Income Statement

Revenues $969,000

Expenses:

Cost Of Goods Sold ($268,000)

Selling And Administrative Costs (132,000)

Amortization Expense (154,000)

Other Expenses (139,000) (697,000)

Income Before Tax Expense $276,000

Income Tax Expense:

Current ($ 97,000)

Future (32,000) (129,000)

Net Income $147,000

Required:

Determine Saratoga Ltd.’s 2016 minimum Net Income For Tax Purposes. In addition, calculate the January 1, 2017 UCC for each CCA class. Indicate why you have excluded some items from your calculations.