accounting tax problem

Problem 52 (Text: Ch. 4, S) Martinez Power Tool Corporation Ltd. has carried on business in Canada since its incorporation under the Canada Business Corporations Act in 1973. Its net income for the year ended December 31, 2013, as determined under generally accepted accounting principles, is as follows: Martinez Power Tool Corporation Limited INCOME STATEMENT For the Year ended December 31, 2013 Sales $8,500,000 Cost of goods sold: Inventory, January 1, 2013 $800,000 Purchases 7,000,000 $7,800,000 Inventory, December 31, 2013 600,000 Cost ofgoods sold Gross prot Selling expenses $ 500,000 General and administrative expenses............................... 100,000 (600,000! $ 700,000 Other income 60,000 $ 760,000 Provision for income taxes 300,000! Netmcome $ 460,000 (7,200,000! $1 ,3 00,000 Included in this summary of the nancial results of Martinez Power Tool Corporation Ltd. are the following details: (1) Closing inventory was written down, for a possible future impairment of fair market value below cost, by $40,000 in 2013 and $25,000 in2012. (2) Selling expenses include: Meals and entertainment .............................................................. $11,500 Golf club memberships ................................................................ 10,000 Charitable donations .................................................................... 5,000 Bonus declared but unpaid ........................................................... 20,000 (3) General and administrative expenses include: Provincial payroll taxes ............................................................... $ 1,000 Depreciation ................................................................................ 20,000 Amortization of goodwill ............................................................. 9,000 Page 1 of2 Problem 5-2 (Cont.) (4) Other income includes: Gain on disposal of an indefinite life licence (proceeds of $44,000; purchased in 2001 for $20,000). $ 5,000 Gain on disposal of truck (proceeds of $10,000; net book value of $7,500) .... 2,500 Interest income ... 3,000 Dividends from taxable Canadian corporations.... ...... 1,500 Volume rebates......... . ..... 2,000 (5) The truck sold during the year had an original cost of $15,000. A replacement truck was purchased in the year at a cost of $20,000. (6) The corporation has operated from leased premises since 2011 when it spent $30,000 on infrastructure during the first year of a five-year lease with two three-year renewal options. During 2013, improvements were made to the premises at a cost of $6,000. (7) In 2002, the corporation purchased goodwill for $36,000 and an indefinite-term licence (described in (4), above) for $20,000. The balance in the CEC account on January 1, 2013, was $18,904. The 2012 T2 Schedule 8 prepared by the corporation indicates that at December 31, 2012, the corporation had the following undepreciated capital cost balances Office equipment.. $43,000 Trucks .... ...... 64,000 Leasehold improvements. 24,375 The bonus was unpaid on May 15, 2014 when the 2013 corporate tax return was being prepared. Required: Calculate the minimum income from business or property of the company for the year ended December 31, 2013 under the provisions of the Income Tax Act. Indicate briefly the reasons for making any necessary adjustments to financial accounting profits. Indicate reasons for not considering an item in your computation. Make sure all items are accounted for in your answer. Page 2 of 2