Question
You have been asked to reconcile accounting income to Division B income for tax purposes for your client, Massive Enterprises Ltd. The income statement for
You have been asked to reconcile accounting income to Division B income for tax purposes for your client, Massive Enterprises Ltd. The income statement for the year ended December 31, 2019 is shown below:
Sales $4,780,000
Cost of sales 3,560,000
Gross profit $1,220,000
Expenses:
Selling $395,000
General and administrative 305,000
Amortization 230,000
Interest on long-term debt 37,000
Other interest 55,000
$1,022,000
Other income:
Gain on sale of fixed asset $1,900
Income from other investments 109,000
$110,900
Income before income taxes $308,900
Income taxes:
Current $93,000
Provision for future income taxes 4,500
$ 97,500
Net income $211,400
During your review of the working paper file and last years tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items:
The December 31, 2019 finished goods inventory is stated net of a reserve for a possible decline in market value of $57,000. (In other words, the company uses the lower of cost or market method for inventory valuation.) Selling expenses include $37,400 in bad debt expense. The company uses the percent of sales method for computing bad debts. Using an aging method of computing bad debt expense, the beginning baclance the the Allowance for doubtful accounts was $72,100. The ending balance in the allowance for doubtful accounts using the aging method was $113,300.
Included in general and administrative expenses are the following: landscaping of $17,000, donations to registered charities of $63,000, memberships in private golf clubs for senior executives of $3,200, meals and entertainment with clients of $12,000, seasonal parties for employees cost of $17,700, provision for warranty reserve of $28,000 (actual warranty costs were $18,000), reserve for decline in value of marketable securities of $13,000, and accrued bonuses that will be paid in August, 2020 in the amount of $30,000.
Included in interest expense on long-term debt and other interest are interest on deficient income tax instalments in the amount of $1,200 and interest on late municipal property taxes in the amount of $500. You also note that the appropriate tax depreciation (Capital cost allowance) is $324,000.
Questions:
(must start with income based on the financial statement and make adjustments)
a. Based on the foregoing information, compute the Division B income from business for tax purposes for Massive Enterprise Ltd. for its 2019 fiscal year. Show all calculations whether or not they seem relevant to the final answer.
b. In point form, indicate and explain why you did not include any of the above amounts in your calculation of employment income.
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