Morton Forms

Morton Forms is a Canadian controlled private corporation owned by Viola Morton. For the

taxation year ended December 31, 2016, Ms. Morton's daughter, Linda, who works in the

business, has calculated a

Net Income for Morton Forms of $

576,183

. In calculating this figure,

Linda used generally accepted accounting principles.

Linda has produced the following Income Statement for the year ended December 31, 2016:

Morton Forms Inc

.

Income Statement

Year ending December 31,

2016

Sales

$ 7,578,903

Cost of Goods Sold

5,468,752

Gross Profit

2,110,151

Expenses

General and Admin

$ 852,000

Amortization Expense

550,000

Interest

8,500

1,410,500

Operating Income

699,651

Other Income:

Loss

on Disposal of Intangible Assets

(17,000)

Interest Income

110,532

Income before income taxes

793,183

Income Taxes

Current

182,000

Future

35,000

217,000

Net Income

$

576,183

During your review of Linda's work and last year's tax return for the corporation, you have made

the following notes:

1.

In the accounting records, the Allowance

for Doubtful Accounts was $25,000 at

December 31, 2016, and $20,000 at December 31, 2105. During 2016, the company

had actual write

-

offs of $11,750. As a result, the accounting Bad Debt Expense was

$16,750. This amount is included in General and Admin

expenses on the Income

statement.

2.

A review of the listing of receivables (for tax purposes), indicates that the actual items

that may be uncollectible total $15,000 at December 31, 210

6

. In

2015

, the company

deducted a reserve for bad debits of $13,000 fo

r tax purposes.

3.

General and Admin Expenses include:

a)

Donatio

ns to registered charities

27,000

b)

Accrued Bonuses

-

Accrued Sept 1,

2016

.

Paid June 15, 2017

78,000

Meals and entertainment costs:

c)

$1,000 per month for premium membership at golf club for

Viola

12,000

d)

$200 per month for membership at golf club for salespeople

2,400

e)

Meals while entertaining clients

32,000

f)

Food costs for Viola's personal chef for her meals at home

5,000

g)

Annual summer BBQ for all staff

6,000

h)

Sponsorship of local baseball

team where company name is

prominently displayed on front of jersey

15,000

i)

Advertising in a US trade magazine directed at US clients

100,000

j)

New software purchased October 1, 2016. ($13,000 for applications

and $25,000 for systems)

38,000

k)

Accounting an

d legal fees for amended to the articles of

incorporation

6,000

l)

Costs to attend annual convention of finger knitters in Thailand.

While at the convention, Viola was sure to hand out business cards

and talk to other attendees about her business with the

intention of

claiming the convention as a business expense.

17,000

4.

Interest expense consists of the following:

a)

Interest expense

-

operations

5,000

b)

Penalty and interest for late and insufficient instalment payments

2

,000

c)

Interest on late payment of

municipal property taxes

1,500

5.

Travel costs (included in general and admin expenses) include both air travel and travel

reimbursement to employees for business travel. The company policy is to reimburse

employees $0.58 per kilometer for the business use

of their automobiles. During the

year, seven employees each drove 4,000 on employment related activities and one

employee drove 7,500 kilometers. None of the kilometer based allowances are required

to be included in the income of the employees.

6.

Maximum

CCA has always been taken on all assets. The undepreciated capital cost

balances at January 1, 2016 were as follows:

Class 1 (4%)

$650,000

Class 8

95,000

Class 10.1

17,850

Class 14

68,000

Class 29

1

135,000

Class 44

65,000

1

In 2012, used manufacturing and processing equipment was purchased for $4,750,000

from another clothing manufacturer who had gone bankrupt. CCA on this equipment

was fully claimed in 2013, 2014 and 2015. Last year, additional manufacturing and

processing

equipment was purchased for $180,000.

7.

There was a loss on disposal of a limited life license to produce copyrighted materials for

a major distributor. This license originally cost the company $95,000 ,

and it was sold for

$63,000 in 2016. The book value of the license at the time of sale was $80,000. When

the license was sold, it was the only asset in its CCA class. The loss was claimed as a

loss on disposal of intangible assets on the Income Statemen

t.

8.

The cumulative eligible capital balance at January 1, 2016 was $18,098. Three

-

quarters

of the $30,000 cost of incorporating the business was put in the CEC account in 2012.

No other items were included in this account prior to the current year.

9.

Purc

hases and sales of equipment and other capital assets made during 2016 were as

follows. (Note: any items discussed in other sections are included in this list as well)

a.

The company purchased land and constructed a new building on it during the year.

The

building was used 95% for manufacturing and processing. The cost of the land

was $350,000, and the building cost $475,000 to construct.

b.

The company purchased a new set of furniture for the reception area for $1,200.

c.

Some outdated desks used by the finance

department with a cost of $5,000 were

sold for proceeds of $3,500.

d.

Landscaping of grounds around the new building cost $35,000. This amount was

capitalized for accounting purposes.

e.

A company car for use by the president of the company was purchased for $

90,000.

This car replaced the only other existing company car, which was purchased in 2013

for $95,000. The old car was sold for $60,000.

f.

A fence around the new building cost $52,000.

g.

New software was purchased: $13,000 for Applications and $25,000 for

Systems.

10.

The company sold some shares that had been purchased several years ago. The

capital gain on these shares was $152,708. Linda didn't know how to account for this,

so she credited the entire amount to retained earnings.

Required:

Determine Morton

Forms' minimum Net Income for Tax Purposes for the year ending December

31, 2106. Ignore GST/HST/PST implications. Using the supplied formatted Excel spreadsheet,

indicate your rationale for the treatment of all information given