Hello,

I'm still trying to understand how they got 125,126 for CCA. I did my schedule and got 121,850.

Can someone please take a look on how i did and tell me what is wrong ?

Thanks

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 Net income after taxes 1 2 3 4 5 6 7 8 9 Provision for income taxes (220,000 + 310,000) Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year. 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. 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 EASI's 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. Because EASI's 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 $97,000. Charitable donations were made in the amount of $9,000. Golf club membership fees in the amount of $2,600 were paid for the sales manager who used the club regularly to close sales. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of $2,300. Management bonuses of $96,000 were accrued at December 31, 2016 ($35,000 was not paid until June 30, 2017 due to lack of sufficient funds). 900,000 Contingent liability Reserve allowed under 20(1)(m) : deduct 530,000 Sec 9 Sec. 18(1)e (8,200) 20(1)(m) No adjustment because the amount is deductible for tax purpose. 0 Inventory reserve (general reserve) is not allowed for tax purpose, so add back 17,000 Sec. 18(1)e General reserve for warranty is non-deductible reserve for tax purpose. Add back : 97,000 - 76,000 = 21,000 21,000 Sec. 18(1)e Not deductible for tax purpose because it is not incurred to earn revenue : add back 9,000 Sec. 18(1)a Disallowed by the act : add back 2,600 Sec. 18(1)(l) 18(1)a 50% of Meals and entertainment is not deductible : add back 50% x 2,300 Bonuses not paid within 179 days of end of the taxation year in which the expense was incurred, have to be added back : add back $35,000 Business related expense, so fully deductible : no The December holiday banquet for the employees cost $15,000. adjustment 1,150 Sec. 67.1 35,000 Sec. 78(4) 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 Damage is deductible since it was paid : no adjustment supplier was awarded damages for breach of contract in the amount of $38,000. 0 0 18(1)a In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting Qualify as financing cost, so add back 80% 10 fees of $5,000 and appraisal fees of $2,000 related to this 80% x (2,000 + 5,000) = financing. The mortgage has a 10-year term and a 30-year amortization period. 5,600 20(1)e A number of years ago, the company issued a bond at a Not the year of maturity, so discount is not deductible : 11 discount. They have been amortizing this discount at the rate of add back $7,000 per year ever since, including this year 7,000 Sec. 18(1)b, par.18(1)(e) par 20(1)f 8,500 18(1)b During the year, the company bought the shares of another 12 company. In completing this transaction, legal fees of $8,500 were incurred. During the year, they borrowed to buy new equipment. The 13 interest expense related to this was $23,000. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an 14 interest charge from the Canada Revenue Agency in the amount of $390. 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 15 death. Life insurance premiums on this policy amounted to $4,600. Business interruption insurance premiums of $3,300 were paid 16 to protect the company in the event a fire forced them to close for a period of time. Computer software costing $750 related to word processing 17 was expensed because they always bought the upgrades each year. 18 Amortization expense on the fixed assets was $86,000. Amortization of goodwill which was bought in 2006 for 19 $100,000 was $2,500. Recapture Capital cost, not deductioble for tax purpose : add back Cost of doing business : no adjustment Disallowed by the act, so non-deductible : add back Life insurance is not collateral : add back Normal cost of doing business : no adjustment Software is capital in nature, not deductible : add back 0 Sec. 18(1)a 390 18(1)t 4,600 Sec. 18(1)a 0 Sec. 18(1)a 750 Sec. 18(1)b Capital items, not deductible : add back 86,000 Capital items, not deductible : add back 2,500 Sec. 18(1)b 1,250 724,140 1,624,140 Deduct : Terminal loss C.C.A C.E.C Net Income For Tax Purposes 11,720 122,125 280 (134,125) 1,490,015 CAPITAL COST ALLOWANCE SCHEDULE UCC Start Classes 1 3 6 8 10 12 13 17 43 Description of Year Building - NRB Building Fence Equipment Trucks Sftw./Tools Leasehold Parking lot Manufac. Equip. Leaseholds Class 13 1 225,000 = 5 2 0 161,720 0 60,000 80,000 5,000 187,500 0 90,000 584,220 25,000 21,000 = 5 4,200 21,000 = 4+3 3,000 0 150,000 0 5,000 36,000 7,000 0 0 0 198,000 25,000 1,500 First year rule 26,500 Total Leaseholds C.E.C. 3/4 x 48,000 = 36,000 750,000 0 40,000 20,000 45,000 750 21,000 125,000 0 1,001,750 Disposals 45,000 225,000 = 6+3 Opening Bal. Additions Disposals 48,000 Balance C.E.C. amount (7%) Balance Additions 40,000 36,000 4,000 280 3,720 st year rule 1/2 yr. Reduced Rate Rule UCC % 375,000 0 20,000 7,500 4,500 0 0 62,500 0 469,500 375,000 0 20,000 67,500 84,500 0 208,500 62,500 90,000 908,000 6% 5% 10% 20% 30% 100% S/L 8% 30% UCC End CCA 22,500 0 2,000 13,500 25,350 0 26,500 5,000 27,000 121,850 of Year 727,500 0 38,000 61,500 63,650 0 182,000 120,000 63,000 1,255,650 11,720 (1,250) Terminal loss Recapture