Eastern Small Wares Ltd. and Byron Products Ltd.

Sheila Solo is the sole shareholder of Eastern Small Wares 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 60% of the common shares of Byron

Products Ltd., a company in a similar line of business but operating in western Canada. The

remaining 40% of BPL's shares are owned by Ramjet Dillon. Dillon is actively involved in

managing BPL's operations. The company's internal accountant has prepared the year-end

financial statements according to GAAP (see Exhibit I).

Required:

1. Determine Eastern Small Ware's minimum net income for tax purposes and its taxable

income for the year ended October 31, 2015.

2. Determine the minimum federal tax payable for the year and the part IV tax if any.

Eastern Small Wares Ltd.

Balance Sheet

As At October 31, 2015

Assets

Accounts Receivable $870,000

Inventories 1,065,000

Investment in Byron Products Ltd. 315,000

Automobiles and Equipment - Cost $140,000

Accumulated Amortization ( 124,000) 16,000

Intangible Assets 13,000

Total Assets $2,279,000

Equities

Bank Overdraft $ 180,000

Note Payable to Bank 226,000

Accounts Payable 482,000

Future Income Tax Liability 53,000

Common Stock - No Par 32,000

Retained Earnings 1,306,000

Total Equities $2,279,000

EXHIBIT I

EASTERN SMALL WARES LTD.

Statement of Income

For the year ended October 31, 2015

Sales $1,333,000

Cost of sales 690,000

Gross profit 643,000

Expenses:

Salaries and wages $320,000

Rent and utilities 24,000

Repairs and maintenance 23,000

Amortization 8,000

Travel and delivery 17,000

Interest 26,000

Insurance 7,000

Reserve for doubtful debts 37,000

Advertising 11,000

Charitable donations 5,000

Legal and accounting 20,000

Other 15,000 513,000

Income from operations 130,000

Other income:

Interest on bonds 35,000

Dividends from taxable Canadian public corporations

Dividend from PBL

8,000

120,000

Gain on sale of marketable securities 40,000

Net gain on land sales 15,000 218,000

Net income before tax $ 348,000

Supplementary Notes:

1. The insurance expense of $7,000 consists of three separate premiums: fire and theft

($2,500), public liability ($1,500), and term life insurance on Solo that has been pledged to the

bank as required collateral for a loan ($3,000).

2. Legal fees include $2,700 for the collection of delinquent accounts receivable, $7,000 for

preparing a debenture agreement to obtain an expanded line of credit with the bank, and

$8,000 for amending the company's articles of incorporation. The remaining costs relate to

annual audit fees.

3. Repairs and maintenance include the following:

Office cleaning, snow removal, lawn care $ 4,500

Engine replacements on two delivery trucks 18,000

Other 500

$23,000

4. This year, the company began a new policy of establishing a reserve of 1% of sales for future

returns of defective merchandise. This reserve, along with several other minor items, is

included as a deduction under "other" expenses. During the year, only $9,000 of defective

merchandise was returned.

5. On the first day of the current taxation year, the company rented additional premises under a

6-year lease agreement. The agreement includes two three-year renewal options.

Improvements costing $28,000 were made to the premises. As an inducement to sign the

lease, the landlord paid ESL $10,000 to cover some of these improvements. This amount was

credited to contributed surplus on the balance sheet.

6. The undepreciated capital cost of certain assets at the end of the previous year was as follows:

Class 8 $27,000

Class 10 31,000

There were no acquisitions or sales of equipment during the current year.

7. At the end of the previous year, the following additional tax accounts existed:

Refundable dividend tax on hand $ 2,000

Capital dividend account 9,000

Cumulative eligible capital 12,000

8. The net gain on land sales ($15,000) resulted from two transactions. One property was

acquired five years ago at a cost of $250,000 as a possible site for a warehouse. However,

when new leased space became available, ESL sold the land for $290,000. The other property

was sold for $205,000 after being held by ESL for only six months. ESL purchased that

property for $235,000. It had been acquired in the expectation that its value would rise rapidly

after a new shopping center was developed nearby. However, the shopping center project

was cancelled, and land values in the area declined.

9. Dillon has informed Solo that BPL declared a dividend of $200,000. The dividend was

received before the current year end.

10. Included in the amount for salaries and wages are estimated bonuses of $30,000 for senior

staff. These will be accrued at year end. The bonuses will be paid in three installments of

$10,000 over the next taxation year. The first installment will be paid four months after year

end, the remaining two at 8 and 12 months, respectively.

EXHIBIT II

Information Pertaining to Byron Products Ltd.

1. BPL has consistently earned from operations pre-tax profits of between $150,000 and

$200,000. It does not earn any investment income. In the taxation year just passed, BPL

earned profits from its business operations of $180,000 and paid taxes of $36,000 on that

income. BPL would like to allocate $200,000 of the small business limit to their organization

and the rest can go to Eastern.

2. BPL declared a dividend of $200,000 (see Exhibit I). BPL had a dividend refund of $50,000

as a result of the dividend being paid.

Required:

1. Determine Eastern Small Ware's minimum net income for tax purposes and its taxable

income for the year ended October 31, 2015.

2. Determine the minimum federal tax payable for the year and the part IV tax if any.