Problem 5-2

(Text: Ch. 4, 5)

Martinez Power Tool Corporation Ltd. has carried on business in Canada since its incorporation under the Canada Business Corporations Act in 1973. Its net income for the year ended December 31, 2015, as determined under generally accepted accounting principles, is as follows:

Martinez Power Tool Corporation Limited

INCOME STATEMENT

For the Year ended December 31, 2015

Sales...................................................................................................................

$8,500,000

Cost of goods sold:

Inventory, January 1, 2015.................................................

$800,000

Purchases..............................................................................................

7,000,000

$7,800,000

Inventory, December 31, 2015..............................................................................................

600,000

Cost of goods sold............................................................................................................................

(7,200,000)

Gross profit............................................................................................................................

$1,300,000

Selling expenses..............................................................................................

$500,000

General and administrative expenses..............................................................................................

100,000

(600,000)

$700,000

Other income............................................................................................................................

60,000

$760,000

Provision for income taxes............................................................................................................................

(300,000)

Net income............................................................................................................................

$460,000

Included in this summary of the financial results of Martinez Power Tool Corporation Ltd. are the following details:

(1)Closing inventory was written down, for a possible future impairment of fair market value below cost, by $40,000 in 2015 and $25,000 in 2014.

(2)

Selling expenses include:

Meals and entertainment......................................................

$11,500

Golf club memberships...........................................................................................

10,000

Charitable donations...........................................................................................

5,000

Bonus declared but unpaid...........................................................................................

20,000

(3)

General and administrative expenses include:

Provincial payroll taxes...........................................................................................

$ 1,000

Depreciation...........................................................................................

20,000

Amortization of goodwill...........................................................................................

9,000

Problem 5-2 (Cont.)

(4)

Other income includes:

Gain on disposal of an indefinite life licence (proceeds of $44,000; purchased in 2004 for $20,000)..................................................................................

$ 24,000

Gain on disposal of truck (proceeds of $10,000; net book value of $7,500)..................................................................................

2,500

Interest income...........................................................................................

3,000

Dividends from taxable Canadian corporations...........................................................................................

1,500

Volume rebates...........................................................................................

2,000

(5)The truck sold during the year had an original cost of $15,000. A replacement truck was purchased in the year at a cost of $20,000.

(6)The corporation has operated from leased premises since 2013 when it spent $30,000 on infrastructure during the first year of a five-year lease with two three-year renewal options. During 2015, improvements were made to the premises at a cost of $6,000.

(7)In 2004, the corporation purchased goodwill for $36,000 and an indefinite-term licence (described in (4), above) for $20,000. The balance in the CEC account on January 1, 2015, was $18,904.

The 2014 T2 Schedule 8 prepared by the corporation indicates that at December 31, 2014, the corporation had the following undepreciated capital cost balances:

Office equipment........................................................................

$43,000

Trucks..................................................................................................

64,000

Leasehold improvements..................................................................................................

24,375

The bonus remained unpaid on May 15, 2016 when the 2015 corporate tax return was being prepared.

Required:

Calculate the minimum income from business or property of the company for the year ended December 31, 2015 under the provisions of the Income Tax Act. Indicate briefly the reasons for making any necessary adjustments to financial accounting profits. Indicate reasons for not considering an item in your computation. Make sure all items are accounted for in your answer.