Hello

Can someone please explain me how they calculate the recapture ?

I got 2,000 and trying to find how they got 1,250.

Thanks

Compute the minimum Net Income for Tax Purposes for Eldridge Asset Sales Inc. for the year-ended December 31, 2013, under the provisions of the Income Tax Act. Please provide a clear working paper trial so that I can allow you part marks (if any). Assume all expenses are reasonable in the circumstances. YOU MUST COMPLETE SCHEDULE 8 AND 10 (IF APPLICABLE). NET INCOME FOR TAX PURPOSES (If required, please use the following page to show additional work). Subtotal Net income for accounting purposes 900,000 Add back provision for income tax 530,000 Total The following items were deducted in arriving at the above net income: 1. Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year Reserve allowed under 20(1)(m) (8,200) 2. During the year, a warehouse worker managed to remove valuable inventory worth $8,000 during the night shift by taking it out in his lunch box. Amount is deductible for tax purposes - no adjustment as tax and accounting treatment are the same 1 3. Late in the year, it became apparent that during the next year new competitive products would come on the market which would drive the price of their products down. They expect this decline to take place in about six months. As a result, they decided to set up a reserve for a decline in the inventory value in the amount of $17,000. They have never set up this kind of reserve before. Inventory reserve is not allowed for tax purposes - add back 17,000 4. Because their products come back for repair under their warranty program, they set up a reserve for this expense on their financial statements. Last year the reserve was $76,000. This year they increased the reserve to $85,000. Warranty is not allowed for tax purposes - 20(1)(m.1) not applicable as the warranty must be insured by third party Accounting treatment - add back last year 76,000 expense this year 85,000 So net expense for accounting purposes is 9,000 - need to add this back for tax purposes 9,000 5. Charitable donations were made in the amount of $8,000. The company 2 expensed the donations as promotional expense. Not a business expense - not deductible for tax purposes 8,000 6. Golf club membership fees in the amount of $1,600 were paid for the sales manager who used the club regularly to close sales. Golf membership fees are not deductible under 18(1)(l) - add back 1,600 7. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of $2,300. 50% of M&E is not deductible under 67.1 - add back 50% x 2,300 1,150 8. Management bonuses of $92,000 were accrued at December 31, 2008 ($27,000 was not paid until June 30, 2009 due to lack of sufficient funds). Bonus not paid within 180 days of year-end pursuant to 78(4) - add back $27,000 27,000 3 9. The December holiday banquet for the employees cost $10,000. Business related expense and 67.1(1) does not apply - - fully deductible - no adjustment necessary 10. EASI had a dispute with one of its major suppliers over the use of the supplier's product. As a result of a court decision, the supplier was awarded damages for breach of contract in the amount of $38,000. Damages was paid - therefore, deductible - no adjustment as tax = accounting - 11. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of $5,000 and appraisal fees of $2,000 related to this financing. The mortgage has a 10year term and a 30-year amortization period. Cost incurred in the course of borrowing money - 20(1)(e) allows cost be the 5,600 deducted over 5 years (e.g. 1,400 is deductible in 2008). Add back the amount not deductible this year $7,000 - 1,400 = 5,600 4 12. A number of years ago, the company issued a bond at a discount. They have been amortizing this discount at the rate of $7,000 per year ever since, including this year. The bond qualifies as a \"shallow discount\" under s. 20(1)(f). Bond has not been settled yet... discount not deductible - add back 7,000 13. During the year, the company bought the shares of another company. In completing this transaction, legal fees of $7,500 were incurred. Legal fees incurred to purchase shares is included in the cost of buying the shares 7,500 - not deductible for tax purposes - add back - 18(1)(b) 14. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of $90. Interest mandated by the Income Tax Act is not deductible under 18(1)(t) - add 90 back 15. A life insurance policy was taken out on the president's life in order to provide funding for the company in the event of his death. Life insurance premiums on this policy amounted to $4,200. Life insurance is NOT used colleteral for financing so 20(1)(e.2) does not apply - 4,200 need to add back 5 16. Business interruption insurance premiums of $3,100 were paid to protect the company in the event a fire forced them to close for a period of time. Normal cost of doing business - deductible - no adjustment - 17. Computer software costing $750 related to word processing was expensed because they always bought the upgrades each year. Software is capital in nature, not deductible under 18(1)(b) - need to add back - should be included in CCA (e.g. Sch 8) 750 18. Depreciation expense on the fixed assets was $66,000. Amortization of goodwill which was bought in 1998 for $100,000 was $2,500. Not deductible under 18(1)(b) - take corresponding CCA and CEC amount 66,000 2,500 6 CAPITAL COST ALLOWANCE AND CUMULATIVE ELIGIBLE AMOUNT- Amount from Schedules 8 and 10 *****YOU MUST COMPLETE SCHEDULE 8 AND 10 (IF APPLICABLE) IN ORDER TO RECEIVE ANY MARKS FOR THIS SECTION******* Show any work relating to Schedules 8 and 10 here: (122,126) MAXIMUM CCA TERMINAL LOSS (25,000) RECAPTURE 1,250 Working Paper for CLASS 13 2006 improvements = $225,000 / (6+3) = 25,000 2008 improvements = $21,000 / (4+3) = 3,000 x 50% = 1,500 Total CCA for class 13= 26,500 7 MINIMUM NET INCOME FOR TAX PURPOSES Additional space to show your work for computation of net income for tax purposes (if you need): 8 Assignment #3 The following information is taken from the financial statements and audit working papers of Eldridge Asset Sales Inc. ("EASI") for its fiscal year ended December 31, 2013. Eldridge Asset Sales Inc. Condensed Unaudited Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross profit Selling expenses General and administrative expenses Net income before provision for income taxes Provision for income taxes current future Net income after tax $16,650,000 (14,050,000) $ 2,600,000 $975,000 195,000 (1,170,000) $ 1,430,000 $220,000 310,000 $ (530,000) 900,000 The following items were deducted in arriving at the above net income: 1. Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year 2. During the year, a warehouse worker managed to remove valuable inventory worth $8,000 during the night shift by taking it out in his lunch box. 3. Late in the year, it became apparent that during the next year new competitive products would come on the market which would drive the price of their products down. They expect this decline to take place in about six months. As a result, they decided to set up a reserve for a decline in the inventory value in the amount of $17,000. They have never set up this kind of reserve before. 4. Because their products come back for repair under their warranty program, they set up a reserve for this expense on their financial statements. Last year the reserve was $76,000. This year they increased the reserve to $85,000. 5. Charitable donations were made in the amount of $8,000. The company expensed the donations as promotional expense. 6. Golf club membership fees in the amount of $1,600 were paid for the sales manager who used the club regularly to close sales. 7. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of $2,300. 8. Management bonuses of $92,000 were accrued at December 31, 2013 ($27,000 was not paid until June 30, 2014 due to lack of sufficient funds). 9. The December holiday banquet for the employees cost $10,000. 1 10. EASI had a dispute with one of its major suppliers over the use of the supplier's product. As a result of a court decision, the supplier was awarded damages for breach of contract in the amount of $38,000. 11. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of $5,000 and appraisal fees of $2,000 related to this financing. The mortgage has a 10-year term and a 30-year amortization period. 12. A number of years ago, the company issued a bond at a discount. They have been amortizing this discount at the rate of $7,000 per year ever since, including this year. The bond qualifies as a \"shallow discount\" under s. 20(1)(f). 13. During the year, the company bought the shares of another company. In completing this transaction, legal fees of $7,500 were incurred. 14. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of $90. 15. A life insurance policy was taken out on the president's life in order to provide funding for the company in the event of his death. Life insurance premiums on this policy amounted to $4,200. 16. Business interruption insurance premiums of $3,100 were paid to protect the company in the event a fire forced them to close for a period of time. 17. Computer software costing $750 related to word processing was expensed because they always bought the upgrades each year. 18. Depreciation expense on the fixed assets was $66,000. An examination of the capital cost allowance schedule for 2013 provided the following opening balances for the undepreciated capital cost for each class of EASI's assets: Class 3 Class 8 Class 10 building....................................... office furniture and equipment.... trucks for transportation of goods $220,000 60,000 80,000 Class 12 Class 13 Class 43 small tools................................... leasehold improvements.............. manufacturing equipment........... 5,000 150,000 90,000 The following additional information was found in the 2013 fixed asset schedules working paper files. 1. The building which cost $250,000 in 2005 was sold for $195,000. It was the only building in Class 3 at the time of its sale. A new building was purchased in April 2013 for $750,000. Also, in February 2013 a land adjacent to the new building was purchased for $100,000 for use as a parking lot by employees and visitors. This lot was paved at a cost of $25,000. A fence was erected around an outside storage area near the new building at a cost of $40,000. 2. New office furniture was purchased for $20,000. This purchase replaced old assets which were sold for $5,000. None of the old assets was sold for more than capital cost. 2 3. Three small trucks purchased in 2008 for $12,000 each were traded in for three new trucks. Each new truck was priced at $15,000, but this was reduced by a trade-in credit of $2,500 for each old truck. 4. Some small tools were sold for a total of $7,000. All of these tools were sold at a price less than their capital cost. 5. Leasehold improvements had been made to a leased warehouse at a cost of $225,000 in 2010. The remaining length of the lease in that year was six years with two successive renewal options of three years each. Further leasehold improvements were made to this warehouse in 2013 at a cost of $21,000. REQUIRED: Compute the minimum Net Income for Tax Purposes for Eldridge Asset Sales Inc. for the year-ended December 31, 2013, under the provisions of the Income Tax Act. Please provide a clear working paper trial so that I can allow you part marks (if any). Assume all expenses are reasonable in the circumstances. 3