Problem 15 The controller of Choleva Products Limited, a public corporation, has provided you with the following draft income statement as well as some notes that she made during the preparation of this statement Choleva Products Limited STATEMENT OF INCOME For the year ended December 31, 2021 Sales Cost of goods sold (Note (1)) Gross profit. Commission income $ 8,300,000 ( 6,800,000 $ 1,500,000 70,000 $ 1,570,000 15,850 Ch. 5/Study Guide - Assignment Problems Administrative and marketing expenses (Note (2)) Amortization (Note (3)) Interest on long-term debt (Note (4) Interest on bank indebtedness . $500,000 80,000 70,000 120.000 (770,000) $ 800,000 Gain on disposal of property, plant and equipment (Note (3)).. Net income before income taxes Provision for income taxes Net income after income taxes 40,000 $ 840,000 (400,000) $ 440,000 Notes Prepared by Controller: (1) The cost of goods sold expense includes the following amounts: (a) A $9,000 loss from a theft by a warehouse employee; (b) A $15,000 reserve for future decline in the value of inventory because of new products expected to be introduced by the competitor. There was no such reserve in 2020. (2) Administration and marketing expenses include: (a) An $11,000 increase in the reserve for warranty expenses; employee: (b) A $15,000 reserve for future decline in the value of inventory because of new products expected to be introduced by the competitor. There was no such reserve in 2020. (2) Administration and marketing expenses include: (a) An $11,000 increase in the reserve for warranty expenses; (b) $4,000 of donations to registered charities; $1,500 for golf club membership dues for the Vice-President of Sales and $2,000 for meals and entertainment expenses at the golf club. The Vice-President of Sales uses the club to generate sales; (d) $85,000 in accrued bonuses, including $62,000 paid to employees on May 31, 2022, and $23,000 paid to employees on June 30, 2022; (e) A $15,000 year-end party for all employees; POD (1) $8,000 of financing fees incurred in connection with the mortgage of the corporation's new plant, including legal fees of $6,000 and an appraisal fee of $2,000; (g) $5,000 of legal fees in connection with the purchase of shares of another company; and (h) $300 for an upgrade of word processing software. (3) The fixed asset section of the controller's working papers indicate the following: (a) The undepreciated capital cost balances at January 1, 2021 were as follows: Class 1 0000 $200,000 Class 8 60,000 Class 10 80,000 Class 13 37,500 Class 14.1 Nil of another company, and pgrade of word processing software. (3) The fixed asset section of the controller's working papers indicate the following: (a) The undepreciated capital cost balances at January 1, 2021 were as follows: Class 1 Class 8 Class 10 Class 13 37,500 Class 14.1 $200,000 60,000 80,000 Nil (b) Gain on disposal of property of plant and equipment consists of the profit on the sale of the corporation's only Class 1 asset (proceeds: $180,000; original cost in 2004: $300,000). The land on which the building was situated was also sold for its fair market value which was equal to its cost in 2005. (During 2021, the corporation made the following purchases: A new office building was purchased in October for $700,000. 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 licence to use patented information (expiring June 30, 2031) was purchased on July 1 for $20,000; and 134 Introduction to Federal Income Taxation Improvements on its leased head office premises which were rented in 2019 for four years with two successive options to renew for five years and five years. Improvements had originally been made in 2019 in the amount of $45,000. Additional improvements were made in 2021 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. (4) Interest on long-term debt includes: (a) Bond discount amortization in the amount of $2,000; (b) $18,000 of interest on bonds issued to buy shares in another company, and (c) $50,000 of interest on the mortgage on the new plant. You have been asked to calculate the corporation's minimum income from business or property for the year ended December 31, 2021. Assume that all expenses are reasonable in the circumstances. For file documentation purposes, you have been asked to support your treatment of each item listed above with a reason or a section reference. Ignore the effects of leap years, Problem 15 The controller of Choleva Products Limited, a public corporation, has provided you with the following draft income statement as well as some notes that she made during the preparation of this statement Choleva Products Limited STATEMENT OF INCOME For the year ended December 31, 2021 Sales Cost of goods sold (Note (1)) Gross profit. Commission income $ 8,300,000 ( 6,800,000 $ 1,500,000 70,000 $ 1,570,000 15,850 Ch. 5/Study Guide - Assignment Problems Administrative and marketing expenses (Note (2)) Amortization (Note (3)) Interest on long-term debt (Note (4) Interest on bank indebtedness . $500,000 80,000 70,000 120.000 (770,000) $ 800,000 Gain on disposal of property, plant and equipment (Note (3)).. Net income before income taxes Provision for income taxes Net income after income taxes 40,000 $ 840,000 (400,000) $ 440,000 Notes Prepared by Controller: (1) The cost of goods sold expense includes the following amounts: (a) A $9,000 loss from a theft by a warehouse employee; (b) A $15,000 reserve for future decline in the value of inventory because of new products expected to be introduced by the competitor. There was no such reserve in 2020. (2) Administration and marketing expenses include: (a) An $11,000 increase in the reserve for warranty expenses; employee: (b) A $15,000 reserve for future decline in the value of inventory because of new products expected to be introduced by the competitor. There was no such reserve in 2020. (2) Administration and marketing expenses include: (a) An $11,000 increase in the reserve for warranty expenses; (b) $4,000 of donations to registered charities; $1,500 for golf club membership dues for the Vice-President of Sales and $2,000 for meals and entertainment expenses at the golf club. The Vice-President of Sales uses the club to generate sales; (d) $85,000 in accrued bonuses, including $62,000 paid to employees on May 31, 2022, and $23,000 paid to employees on June 30, 2022; (e) A $15,000 year-end party for all employees; POD (1) $8,000 of financing fees incurred in connection with the mortgage of the corporation's new plant, including legal fees of $6,000 and an appraisal fee of $2,000; (g) $5,000 of legal fees in connection with the purchase of shares of another company; and (h) $300 for an upgrade of word processing software. (3) The fixed asset section of the controller's working papers indicate the following: (a) The undepreciated capital cost balances at January 1, 2021 were as follows: Class 1 0000 $200,000 Class 8 60,000 Class 10 80,000 Class 13 37,500 Class 14.1 Nil of another company, and pgrade of word processing software. (3) The fixed asset section of the controller's working papers indicate the following: (a) The undepreciated capital cost balances at January 1, 2021 were as follows: Class 1 Class 8 Class 10 Class 13 37,500 Class 14.1 $200,000 60,000 80,000 Nil (b) Gain on disposal of property of plant and equipment consists of the profit on the sale of the corporation's only Class 1 asset (proceeds: $180,000; original cost in 2004: $300,000). The land on which the building was situated was also sold for its fair market value which was equal to its cost in 2005. (During 2021, the corporation made the following purchases: A new office building was purchased in October for $700,000. 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 licence to use patented information (expiring June 30, 2031) was purchased on July 1 for $20,000; and 134 Introduction to Federal Income Taxation Improvements on its leased head office premises which were rented in 2019 for four years with two successive options to renew for five years and five years. Improvements had originally been made in 2019 in the amount of $45,000. Additional improvements were made in 2021 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. (4) Interest on long-term debt includes: (a) Bond discount amortization in the amount of $2,000; (b) $18,000 of interest on bonds issued to buy shares in another company, and (c) $50,000 of interest on the mortgage on the new plant. You have been asked to calculate the corporation's minimum income from business or property for the year ended December 31, 2021. Assume that all expenses are reasonable in the circumstances. For file documentation purposes, you have been asked to support your treatment of each item listed above with a reason or a section reference. Ignore the effects of leap years