Question 1 (22 Marks 40 minutes) The following is a condensed income statement for IBM Inc., a Canadian-controlled private corporation with a December 31, 2021, year end. IBM Inc. Income Statement for the year ended December 31, 2021 Sales Cost of goods sold Gross profit... General and administrative expenses. Loss from operations Other income (deductions). Net income before income taxes Income taxes..... Net income after tax $9,665,000 $8,878,000 5787,000 $1.599.000 $(812,000) $1,408.000 $596,000 (195.000) S401.000 Notes: (1) The "Cost of goods sold" an inventory reserve of $75,000 to account for slow-moving inventory items. This reserve was computed based on late 2021 selling prices of the inventory items involved. (2) The "General and administrative expenses" include the following: a) premiums of $2,400 ($200 per month) paid toward a $500,000 term life insurance policy on the president; the company is the beneficiary of the policy; the life insurance policy is required as collateral for bank loan that was obtained on September 1,2021; the premiums paid equal the net cost of pure insuranc relating to this policy; b) an allowance for doubtful accounts of $8,000 based on actual specific accounts they did not expect to collect c) depreciation of $280,000; d) Promotion expenses as follows: i) Political donations which resulted in a significant government contract. $7,000 ii) Charitable donations which resulted in a significant contract from a member of the charity's board.. ........ $5,000 iii) Cost of sponsoring a local hockey team... $4,200 iv) Meals with customers.......... $6,000 v) Theatre tickets for suppliers...... 2,800 vi)Year-end party for all staff.. 6,800 vii)Advertising in a Florida magazine aimed at Canadians vacationing there 5,500 viii) Membership in a golf club which the company used extensively in entertaining customers. 4,700 (3) The Other income (deductions)" account included the following deductions: A. Cost of amending its articles of incorporation...... 3,100 B. Costs incurred in connection with the issuance of shares..... 6,500 C. Costs incurred in connection with the acquisition of shares of another company... 12,200 D. Costs incurred in connection with negotiations for a new bank loan.. 9,000 E. Interest paid to Revenue Canada on the late payment of tax instalments... 1,650 F. Loss from theft by accounts receivable clerk.... 29,000 G. Damages paid to supplier for breach of contract... 25,000 H. Cost of landscaping around the building....... 3,200 (4) The corporations' accountant has told you that IBM is entitled to a $380,000 capital cost allowance claim in 2021 and you have verified that this is correct. (5) In December 2021, IBM announced an early retirement plan for employees aged 60 to 65. The deadline for acceptance for eligible employees is March 1, 2022. Management has estimated that early retirement payments of $80,000 are likely to be required under the plan and had deducted this amount in computing "Other income (deductions)". There is no legal obligation for this expense at December 31, 2021, since no employees have accepted the offer. Required: (A) Compute net income for tax purposes for 2021. Show all calculations whether or not they seem relevant to the final answer (B) Comment on all items omitted from the calculation
