Taxation 1 - chapter 5 Income from business
PROBLEM SEVEN Simone Cherniak has just completed the second year of operating her veterinary clinic. You have been retained by Cherniak for tax assistance and advice. At a recent meeting, you gathered information on her practice, which is presented below. For the year ended December 31, 20X2, the clinic showed a profit of $123,700, as follows: Professional service $321,000 Gross profit from surgical instrument sales 28,000 349,000 Administration and other expenses 228,300 120,700 Interest income 3,000 Net income $123,700 Included in the above is depreciation/amortization expense of $23,000 on fixed assets and amortization of Page 170 development costs of $4,400. Additional information is outlined below.1. On February 28, 20X2, Cherniak purchased a competitor's business and merged it with her own. The following assets were acquired: Truck $ 18,000 Equipment 50,000 2. During the year, Cherniak designed and patented a new surgical instrument. On July 1, 20X2, a legal fee of $4,000 was paid for the patent (life of 20 years) registration; this amount is included in administration expenses. In October, $16,000 was spent on consultants to research metal alloys, and this cost is being amortized as development costs in the financial statement. 3. Some of the items included under administrative and other expenses are as follows: Group life insurance for office staff $ 1,100 Christmas gifts to staff (under $200 each) 1,400 Dues to golf club (for employee) 1,200 Meals and drinks for clients 400 Books (15-volume set on veterinary medicine) 3,000 Interest on car loan (six months) 2,100 Finder's fee for a loan to finance equipment 1,000 4. The income statement includes a cost of $3,150 for attending three conventions during the year. Convention 1 ($750) was in July 20X2. Conventions 2 ($1,350) and 3 ($1,050) were both in December 20X2. Each convention includes a cost of $100 for meals. For each of the December conventions, airfare of $200 was included in accounts payable at the end of the year.5. Vehicle costs deducted on the income statement include operating costs of $2,400 for the automobile (including $400 for car parking). The automobile was driven 24,000 km. Of this, 12,000 km was for customer travel, 2,000 km was for travel between her home and the clinic, and 10,000 km was for personal travel. 6. Cherniak expects that a number of the new manufactured surgical instruments will be returned for modification, which she will do at no extra cost to the customer. The income statement includes a $2,000 deduction based on her estimate of the returns. As of December 31, 20X2, $800 of costs were incurred for returned items. 7. Cherniak moved from rented premises to new rented premises on February 28, 20X2, with 20 months remaining on the old lease. The landlord accepted a payment of $8,000 in exchange for cancelling the lease. The accounting records have amortized this cost over the remainder of the lease term and accordingly have deducted $4,000 ($8,000 x 10 m/20 m ) as rent expense. 8. Capital cost allowance (CCA) for tax purposes has been correctly calculated as $15,000. Required: Determine Cherniak's income from business for tax purposes for the 20X2 taxation year. Identify any other sources of income that are taxable in the year
