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AP 6 - 5 ( Sole Proprietorship - Reconciling Income Tax to Accounting ) Several years ago George Danton decided he could benefit from his
AP Sole ProprietorshipReconciling Income Tax to Accounting Several years ago George Danton decided he could benefit from his love of flowers by opening a flower shop. The shop uses a calendarbased fiscal period ending December The business has been a great success, both in terms of being profitable and in enhancing George's enjoyment of life. As George is the sole proprietor of the business, he has had no need to report income to anyone else. Given this, he has always tried his best to use income tax concepts and principles to calculate his annual business income. Based on his understanding of these income tax principles, George determine that his business income for the fiscal period was $ George has decided to expand his business into a neighbouring town. To do this, he needs a mortgage on the property that will be acquired for operations in the new location. To his dismay, the lender is insisting on financial statements prepared in accordance with Accounting Standards for Private Enterprises ASPE As he has no knowledge of ASPE, he has asked you to determine the amount of ASPEbased income that Danton's Flowers has earned for the fiscal period. Other Information: In the business income calculation based on income tax ITA George deducted $ in business meals and entertainment expenses. Because his shop is near the US border, George spent $ advertising on a US television station and deducted the amount in full. The commercials were directed at Canadian resident viewers. Because of a broken window during early December, live flowers costing $ were destroyed. In George paid a highlevel Canada customs official bribes totalling $ In return, he received priority clearance for all his imports, as well as clearance for live plant imports that should have been restricted. Since this bribe is considered to be an illegal payment to a government official, it is not deductible for income tax purposes. In George made $ in contributions to a local hospital that is a registered charity. He claimed this amount as a business expense. For income tax purposes, the method chosen to value ending inventory is FMV which is $ The cost, determined on a FIFO basis, was $ George deducted $ in CCA for the year. You have determined that amortization under George deducted $ in CCA for the year. You have determined that amortization under ASPE would have been $ George spent $ on uniforms for the local men's softball team, whose games are heavily attended and supported by the community. George owns a delivery vehicle that cost $ It is the only class property of the business and, as of January the class had a UCC balance of $ During the year, the vehicle was sold for $ and replaced with a leased delivery vehicle. Under ASPE, its carrying value at the time of the sale would have been $ The leasing expenses are fully deductible for income tax purposes. In December George spent $ on landscaping the grounds around his store. Given the late date at which this work was done, no amortization would be required for accounting purposes with respect to these costs for It is expected that these landscaping improve ments will last at least years. During George sold class property for $ The capital cost of the property sold was $ At the end of the year the UCC of class was positive and other properties remained in the class. The accounting carrying value of the property that was sold was $ No income tax was deducted in calculating net income. Required: Determine the ASPEbased accounting income for Danton's Flowers. Do not include in your calculations any income tax that George will have to pay on this income. If you do not make an adjustment for any of the items included in other information, indicate why this is the case. General Comment This reverse reconciliation exercise requires using the opposite approach applied in a typical reconciliation from accounting income to net income. For example, amortiza tion would be added and CCA deducted in a standard reconciliation. In this reverse approach, however, amortization would be deducted and CCA added. If possible, please complete the problem in a table.
AP Sole ProprietorshipReconciling Income Tax to Accounting
Several years ago George Danton decided he could benefit from his love of flowers by opening a
flower shop. The shop uses a calendarbased fiscal period ending December The business has
been a great success, both in terms of being profitable and in enhancing George's enjoyment of life.
As George is the sole proprietor of the business, he has had no need to report income to anyone
else. Given this, he has always tried his best to use income tax concepts and principles to calculate
his annual business income. Based on his understanding of these income tax principles, George
determine that his business income for the fiscal period was $
George has decided to expand his business into a neighbouring town. To do this, he needs a
mortgage on the property that will be acquired for operations in the new location. To his dismay,
the lender is insisting on financial statements prepared in accordance with Accounting Standards
for Private Enterprises ASPE
As he has no knowledge of ASPE, he has asked you to determine the amount of ASPEbased
income that Danton's Flowers has earned for the fiscal period.
Other Information:
In the business income calculation based on income tax ITA George deducted $ in
business meals and entertainment expenses.
Because his shop is near the US border, George spent $ advertising on a US television station
and deducted the amount in full. The commercials were directed at Canadian resident viewers.
Because of a broken window during early December, live flowers costing $ were destroyed.
In George paid a highlevel Canada customs official bribes totalling $ In return,
he received priority clearance for all his imports, as well as clearance for live plant imports
that should have been restricted. Since this bribe is considered to be an illegal payment to a
government official, it is not deductible for income tax purposes.
In George made $ in contributions to a local hospital that is a registered charity. He
claimed this amount as a business expense.
For income tax purposes, the method chosen to value ending inventory is FMV which is
$ The cost, determined on a FIFO basis, was $
George deducted $ in CCA for the year. You have determined that amortization under
George deducted $ in CCA for the year. You have determined that amortization under
ASPE would have been $
George spent $ on uniforms for the local men's softball team, whose games are heavily
attended and supported by the community.
George owns a delivery vehicle that cost $ It is the only class property of the business and,
as of January the class had a UCC balance of $ During the year, the vehicle was sold for
$ and replaced with a leased delivery vehicle. Under ASPE, its carrying value at the time of the
sale would have been $ The leasing expenses are fully deductible for income tax purposes.
In December George spent $ on landscaping the grounds around his store. Given
the late date at which this work was done, no amortization would be required for accounting
purposes with respect to these costs for It is expected that these landscaping improve
ments will last at least years.
During George sold class property for $ The capital cost of the property sold
was $ At the end of the year the UCC of class was positive and other properties
remained in the class. The accounting carrying value of the property that was sold was $
No income tax was deducted in calculating net income.
Required: Determine the ASPEbased accounting income for Danton's Flowers. Do not
include in your calculations any income tax that George will have to pay on this income. If you
do not make an adjustment for any of the items included in other information, indicate why this
is the case.
General Comment This reverse reconciliation exercise requires using the opposite approach
applied in a typical reconciliation from accounting income to net income. For example, amortiza
tion would be added and CCA deducted in a standard reconciliation. In this reverse approach,
however, amortization would be deducted and CCA added.
If possible, please complete the problem in a table.
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