You have been asked to reconcile net income for accounting purposes to taxable income for your client, X Ltd., a manufacturer of car tires. X Ltd. is a Canadian Controlled Private Corporation. The income statement for the year ended December 31st. 2021 is shown below:-

X Ltd.

Statement of Income

For the year ended December 31st.2021

Sales..................................................................................................................................................$4,600,000

Cost of Goods Sold............................................................................................................................ 2,360,000

Gross Profit.....................................................................................................................................$ 2,240,000

Operating Expenses........................................................................................................................... 940,000

Administrative expenses................................................................................................................... 900,000

Income from operations...................................................................................................................... 400,000

Other income and expenses................................................................................................................141, 000

Income before taxes........................................................................................................................... .$541,000

Income taxes..........Current..................................................................................................................... 91,400

Deferred................................................................................................................... 7,000

Net Income after taxes...........................................................................................................................$442,600

Additional Information:-

During your review of the working paper and last year's tax return, you made the following notes to yourself because you think that there might be tax implications associated with these items:-

i. X Ltd., a CCPC is owned 50% by Duncan Smith and the other 50% is owned by his sister Delores Smith. The CEO of the Company is Jack Laurie who is not related to the Smith's.

ii. The opening allowance for doubtful accounts at January 1st.2021 was $24,000. The closing allowance was $36,000. The net increase has been reflected as bad debt increase in the operating expenses..

iii. Operating and administrative expenses include the following amounts:-

a. Landscaping expenses............................................................................................... $12,000

b. Amortization expense............................................................................................... 58,000

c. Donations to registered charities.............................................................................. 5,000

d. Premiums on life insurance premiums for two senior managers. These

policies are not required as collateral......................................................................... 1,500

e. Meals and entertainment expenses............................................................................. 4,000

f. Curling club membership for the vice-president of marketing.................................. 6,000

g. Reserve for future warranty expense for hockey sticks(actual expenses

paid in the year for warranty expenses was 41,200).................................................. 1,800

h. Management bonuses all paid by June 28th. 2022.......................................................300,000

i. Contributions for employees to the company's registered pension plan. The contributions were not actually made until March 31st.2022. The pension plan is a defined contribution plan. The Company matches the employee contributions on a dollar for dollar basis:-

Registered Pension Employment

Plan Compensation

President...............................................................$17,025...............................................$200,000

Vice-President....................................................... 10,200............................................... 125,000

Accountant............................................................. 5,400............................................... 70,000

j. $10,000 payment to a television station in the United States for commercials promoting the Company's products in the Montreal area of Canada.

iv. The schedule of income and expenses includes:-

a. Interest on late corporate income tax installments........................................ 300

b. Interest on loan obtained in October 2021 used to purchase vacant

land on which the Company plans to build a parking lot in the future.......... 6,000

v. The schedule of income and expenses shows:-

a. Gain on sale of land..............................................................................................$130,000

(In 2019 , the Company sold a piece of land for $222,000. The land was being held to build a warehouse but since alternative arrangements were made for warehousing the Company decided to sell the land. This land was purchased in 2018 for $90,000. The selling cost involved to sell the land was $2,000)

b. Dividend income received from Cdn. Tire, a CCPC........................$11,000

c. One staff Xmas party and two summer barbecues........................$4,500

d. Staff attendance at three conventions.............................................$6,000

e. Appraisal fees .......................................................................................$10,000

iii. A review of the fixed asset account showed, the Undepreciated Capital Cost Allowance at December 31st.2021 as follows:-

Class #3(5%)......Building.................................................................$204,000

Class #8(20%)......Furniture& Fixtures...........................................$100,000

Class #10(30%)......Delivery Van.................................................... $30,000

Class #10.1(30%)...Automobile......................................................$10,000

During the year the following purchases and dispositions occurred:-

a. The Class #3 building was sold for $400,000. The building was acquired in 2018 for $300,000. A new building to replace this building was bough in April 2022 for $500,000.

b. A photocopier was purchased in May for $6,000.

c. The automobile for the CEO was sold in September 2022 for $5,000 and replaced with a new automobile costing $40,000.

Required:-Prepare the reconciliation from accounting income to taxable income for the year ended December 31st. 2021 (16 marks for worksheets).