Quality Cabinets Inc. (Quality) manufactures custom kitchen cabinets from its location in Squamish, British Columbia. The cabinets are then sold to contractors who install them in kitchens. Bruce MacDonald is the owner and has approached you, a CPA with a local CPA firm, to advise on some accounting issues that arose during the year and to help prepare the corporate tax returns, including the associated accounting entries. It is January 31,2023.

Bruce also requires a calculation of taxable income for the most recent year ended December 31, 2022. The calculation should be prepared in Excel. He has also requested that you prepare the year-end journal entry for taxes payable using a marginal rate of 14% on income less than the business limit. Bruce has provided you with the draft statement of income and retained earnings (Appendix II) and additional information you will need (Appendix III). Appendix II Quality Cabinets Inc. Statement of income and retained earnings For the period ended December 31 (Draft)

2022 2021 (Draft) (Audited) Sales $ 8,959,800 $ 8,834,000 Cost of sales 5,939,648 6,129,709 Gross profit 3,020,152 2,704,291

Expenses: Advertising and promotion 357,900 266,500 Amortization 219,163 166,584 Automobile 140,800 102,600 Bad debts 17,250 19,110 Donations 1,200 1,000 Dues and fees 7,500 Insurance 69,600 57,200 Interest and bank charges 119,203 46,600 Office 101,200 108,700 Professional fees 67,700 34,800 Property taxes 44,700 40,900 Repairs and maintenance 207,100 155,100 Rent expense 84,654 Salaries and wages 1,160,460 1,175,600 Travel 117,666 103,900 Utilities 67,600 70,200 Warranty 72,059 69,482 Income before taxes 164,397 286,015 Income taxes 70,000 76,754 Net income 94,397 209,261 Retained earnings, opening 2,561,214 2,360,953 Dividends 48,750 9,000 Retained earnings, closing $ 2,606,861 $ 2,561,214

Appendix III Tax information Prepared by Bruce MacDonald 1. Information regarding property, plant, and equipment at December 31: Additions to property, plant, and equipment: Manufacturing equipment $ 313,888 Delivery trucks 169,370 Office equipment 14,230 Computer hardware 12,110 Computer software 13,670 Leased asset 1,068,067 $ 1,591,335

The manufacturing equipment and delivery trucks were acquired in February of the current year; the office equipment, computer hardware and software were acquired in November of the current year. All software additions this year were application software. Qualitys building was purchased five years ago. At that time, Quality did not make an election to place the building in a separate Class 1. $325,625 of amortization is included in current-year cost of sales in the income statement. Lease payments related to the capitalized lease asset for the year amounted to $98,000 and interest on the lease liability (included in interest and bank charges) was $48,503. Lease payments under the provincial land agreement totalled $36,000 and were included in rent expense. 2. Undepreciated capital cost balances at the beginning of the year were as follows: Class 1 $ 416,400 Class 8 131,800 Class 10 76,300 Class 12 - Class 50 4,360 $ 628,860

3. Bruce is a member of the Blue Ridge Golf and Country Club (BRGCC), where he entertains many of the companys customers and suppliers. Payments to BRGCC during the year are included in advertising and promotion and consisted of the following: monthly dues: $8,280 (total for the year) green fees: $4,360 restaurant and beverage costs: $10,290

Appendix III (continued) Tax information Prepared by Bruce MacDonald

4. Other meals and entertainment, which are included in advertising and promotion, included the following: business lunches and dinners: $9,010 tickets to sporting events: $2,870 Christmas dinner (for all of the companys employees): $3,790 5. Insurance includes premiums for Bruces key person life insurance policy of $12,000.

6. Warranty expense is equal to the cash paid.

7. The company was late in filing its corporate tax return last year and deficient in its instalment payments during the year. Interest and penalties of $690 were charged to the company. These have been expensed on the current-year income statement.

8. The company has a net capital loss carried forward from five years ago in the amount of $4,100 ($8,200 capital loss).

9. During the year, Quality sold its portfolio investments for $35,000. Bruce was happy that a profit was made on the original cost of $29,850. The gain of $5,150 was recognized on the financial statements and included as a credit in interest and bank charges. One of the investments paid a capital dividend of $2,000 in the current year. The dividend was also included as a credit to interest and bank charges.

10. All donations made in the year were to registered charitable organizations.

11. Quality incurred $10,000 as a refinancing fee for the term loan.

12. The balances in the eligible refundable dividend tax on hand, non-eligible refundable tax on hand, and capital dividend accounts at the beginning of the year were nil.

13. Quality uses the taxes payable method for recording income tax.

14. Quality is a Canadian-controlled private corporation that is eligible for the small business deduction. The marginal rate for business income below the business limit is 14%. Quality is not associated with any other companies.

15. The marginal rate for income in excess of the business limit is 30%. The rate for aggregate investment income is 50%.

16. The $70,000 recorded as income tax expense represents instalment payments