F2023 Case II: Calculating Net Business Income

Paul Poti is the sole proprietor of Poti Enterprises, a small shop manufacturing and selling widgets located in Edmonton, AB. The shop has been in operation for several years. Paul provides you with the Statement of Income for the proprietorship for December 31 of the current year:

Poti Enterprises Statement of Income for the Year Ended December 31 (Current Year)

Item	Amount	Amount
Sales		$600,000
Cost of sales:
Opening inventory	$50,000
Purchases	250,000
	300,000
Closing inventory	60,000	240,000
Gross profit		360,000
Expenses:
Accounting and Legal (Note 2)	4,000
Advertising and promotion (Note 3)	5,000
Depreciation (Note 4)	26,000
Automobile expenses	7,000
Bad debts (Note 5)	4,000
Insurance (Note 6)	7,000
Interest	19,000
Office expenses (Note 7)	12,000
Rent	36,000
Wages and benefits (Note 8)	110,000	230,000
Net income for the year:		$130,000

Notes to the above statement of income:

1. Poti Enterprises is a proprietorship operated by Paul Poti.

1. Accounting and legal include legal fees related to Pauls dispute with regard to a personal car accident, in the amount of $2,000.

1. Advertising and promotion include Meals and Entertainment costs in the amount of $4,250.

1. Information for capital cost allowance (CCA) purposes:

(a) The undepreciated capital cost balances at January 1, 2022 were Class 1: $200,000; Class 8: $60,000; Class 10: $80,000; Class 13: $37,500; Class 14.1: $0

(b) Disposal of property of plant and equipment: sale of the corporations only Class 1 asset (proceeds: $180,000; original cost in 1995: $300,000). The land on which the building was situated was sold for its fair market value which was equal to its cost in 1995.

(c) During 2022, the corporation made the following purchases:

- A new office building (Class 1, 6%) was purchased in October for $700,000.

In addition, the cost of the related land was $400,000. It cost $20,000 to pave part of the land for use as a parking lot;

- New office furniture was purchased for $25,000. This purchase replaced office furniture which was sold for its $4,000 net book value (original cost: $10,000);

- An unlimited life franchise was purchased for $100,000;

- A 10-year patent, class 44 (expiring after 10 years) was purchased on July 1 for $20,000;

- Improvements on its leased head office premises which were rented in 2020 for four years with two successive options to renew for five years and five years. Improvements had originally been made in 2020 in the amount of $45,000. Additional improvements were made in 2022 at a cost of $28,000.

(d) During the year, the corporation sold some small tools (each costing less than $500) for their net book value of $500.

1. The company has set up an allowance for doubtful accounts based on a review of the Accounts Receivable on December 31 of the current year. This is a procedure that the proprietorship follows every year.

1. Insurance includes life insurance premiums for Paul Poti in the amount of $3,000. This insurance is required as collateral for the business bank loan.

1. Office expenses include the purchase of a computer, on January 15 of the current year, for $1,500 and $300 for an upgrade of accounting software for payroll tax information (Hint: these amounts were expensed in accounting statements, but for tax purposes they have to be added to Class 50 and Class 12).

1. Wages and benefits include the club dues/membership fees paid to the Royal Oak Club in the amount of $6,000. The club dues are paid for the five managers who take clients to the Royal Oak Club on a regular basis for business purposes.

1. The following information was taken from various expense accounts:

1. Hockey game tickets given to customers................. 8,000
2. $3,000 for auto allowance paid to the sole employee. This allowance was calculated as $1 per km for 3,000 kms driven by the employee.
3. Cost of sponsoring local little league teams.............. 5,000
4. $8,000 of financing fees incurred in connection with the bank loan
5. On December 1 of the current year, $10,000 was paid to one of the tenants to cancel a rental lease agreement because the company required the space for its own business operations. The amount was deducted in accounting statements. The lease of property had five years remaining at that time.

You have been asked to reconcile accounting income to Division B net business income for tax purposes for your client who is operating as a proprietorship. Ignore the effects of leap years.

Part A: Using Excel template on D2L, prepare a Reconciliation Schedule to reconcile accounting net income to net business income for tax purposes. For each amount, give brief explanation to support your response (i.e., explain why the amount is added or subtracted in Schedule 1 or why no adjustment to accounting income is required). Provide appropriate references to ITA.

Part B: Prepare a Capital Cost Allowance Schedule in good form.

Part C: When finished, upload your Excel workbook into Case Study II folder in D2L. Obtain solution from the instructor. Grade your answer and explain why you made the errors. Was it a calculation error, misunderstanding of the concept, etc.? Upload graded Excel work with your reflection into Case Study II in D2L to receive reflection marks.

Can you please solve Part A and B of the question step by step in excel with ITA references well. Thank you