The following income statement was prepared (correctly, in Canadian dollars) for financial accounting purposes by MBA Incorporated.

Income Statement

For the period ending December 31, 2014

Sales $2,912,400

Cost of Goods Sold (873,720)

Gross Margin 2,038,680

Selling, General, and Administrative Expenses:

Appraisal costs (Note 1) $ 2,000

Deductions regarding bad debts (Note 2) 8,200

Political donations 5,400

Ontario corporation capital tax 1,300

Depreciation (Note 9) 24,000

Insurance (Note 3) 8,000

Legal and audit fees (Note 4) 7,000

Pension plan contributions (Note 5) 30,000

Salaries and wages (Note 6) 198,000

Travel and entertainment (Note 7) 21,000

Donations to the United Way 14,300 (319,200)

Other income

Gain on sale of fixed assets (Note 9) 141,700

Net Income before Interest and Taxes $1,861,180

Interest (Note 8) $17,000

Provision for income taxes 828,225 (845,225)

Net Income $1,015,955

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Notes:

1. Appraisal costs include the following: Determination of values for capital assets in anticipation of their sale $1,200
2. The corporation accounts for bad debts under the allowance method using a percent of sales estimating method. If the corporation had used the aging method to determine bad debts, the beginning balance in the Allowance for Doubtful Accounts would have been $18,900, and the ending balance would be 24,700.
3. The insurance expense account includes a premium of $2,300 which was paid on a term life insurance policy on the life of the President. On April 1, 2014, this policy was assigned as collateral to obtain a loan.
4. Legal and audit expenses include the following: Cost of obtaining articles of amendment for the corporate charter $1,600, Cost of annual audit $2,400
5. Current services contributions to the money-purchase (defined contribution) registered pension plan (matched by employees) were paid in respect to the following executives (employment compensation for the year is shown in brackets): President ($165,000), $19,000 + Vice-President ($85,000), 11,00 = $30,000
6. Salary and wages includes a payment of $24,000 to the son of the president. The presidents son is 12 years old and does not perform services for the corporation. Salary and wages also includes a bonus to the president in the amount of $32,000 that will not be paid until October, 2015.
7. Entertainment includes expenditures on meals and tickets to sporting events in the amount of $5,000 for client promotion purposes. It also includes $1,700 for maintenance of a yacht used 100% by the corporation in entertaining customers and suppliers.
8. Interest expense consisted of the following: Bond interest on funds borrowed to acquired fixed assets for use in the business, $ 4,700 + Interest on deficient federal income tax instalments, 3,800 + Interest on bank loan to acquire shares in a Canadian corporation, 6,600 + Interest on funds borrowed to renovate the house owned by the President of the company, 1,900 = $17,000

9. The appropriate tax CCA and CEC deductions, including amounts related to recapture and terminal loss on the sale of assets is $118,000. There were no assets sales at amount greater than original cost.

Questions:

1. In good form, and providing all necessary calculations, prepare a reconciliation between net income per the audited income statement and income from business (Division B) for tax purposes.
2. Briefly, explain why any of the above-listed items were omitted from your reconciliation.