Ziggys Inc. is a retailer of highly specialized clothing that opened for business on May 1, 2015, in a leased store in a strip mall. A condensed income statement for Ziggys Inc. for its year, ended December 31, 2017, shows the following:

Condensed Income Statement

For the Year Ended December 31, 2017 (000s)

Sales $ 1,932

Cost of sales (1,439)

Gross profit 493

General and administrative expense (279)

Other (54)

Income before income taxes 160

Income tax expense (13)

Net income $ 147

The December 31, 2017, finished goods inventory is stated net of a reserve for a possible decline in market value of $57,000 (in other words, the inventory is costed at lower of cost or market). Cost of goods sold includes a charge of $2,200 to set up an allowance for returns (at 0.1% of sales) that are not subsequently saleable at full retail price. No such allowance was recorded last year-end because the company only discovered that the allowance was necessary this year.

The company recorded a reserve for a decline in value of marketable securities in the amount of $16,000 (there was no reserve at the end of the prior year). The bad debt expense recorded for the year was $38,640, based on 2% of sales. The beginning balance in the Allowance for Doubtful Accounts was $72,960. Based on an aging of accounts receivable, the ending balance in the Allowance for Doubtful Accounts should be $83,112. Because EASIs products come back for repair under their warranty program, they set up a reserve for this expense on their financial statements. Last year the reserve was $59,000. This year they increased the reserve to $73,000. The warranty program is self-funded by EASI.

During the year, a warehouse worker managed to steal valuable inventory costing $5,400 during the night shift by taking it out in his lunch box. This amount has been recorded as a cost due to theft in the accounting records.

General and administrative expenses include the following:

Contributions to a registered pension plan made monthly for the two key employees, expensed by the corporations accountant, were as follows:

Registered Pension Plan Employment compensation

President $21,000 $223,000

Store manager $12,800 $120,000

The pension plan is a defined contribution (money-purchase) plan. The contributions above were matched by equal contributions made by the employee.

The company paid the following amounts to Sun Insurance Limited during the year:

Group term life insurance for the four full-time employees, $4,200 + $200,000 term life insurance policy on the president, which was included in the Insurance expense account, $700= $4,900

Ziggys Inc. is the beneficiary of the insurance policy on the president. The term life insurance policy on the president was assigned to the bank as collateral for a $500,000 loan from January 1 through July 31, 2017. The loan was repaid on August 1, 2017 in favour of an operating line of credit.

The following selected information was taken from the Promotions account:

Charitable donation to the local United Way, $4,500 + Political contributions to the local politicians, 2,500 + Hockey tickets given to suppliers as Christmas gifts, 2,800 + Meals and entertainment incurred by the owner while negotiating with suppliers, 2,000 + Golf green fees (amounts charged for use of the golf club) incurred while entertaining suppliers,1,800 + Two customer parties and one staff party (staff and significant others make up about one-third of the attendees), 12,000 = $ 25,600

The companys Professional expense account included the following legal and accounting fees:

Accounting fees for yearend work and monthly bookkeeping, $15,000 + Legal fees incurred on the purchase of capital assets during the year, 2,000 + Legal and accounting fees incurred in connection with negotiations for a line of credit at the bank, 4,000 = $21,000

Other expenses deducted in the financial accounting computation of income include:

Depreciation and amortization, $47,000 + Interest on the loan and operating line of credit, 7,500 + Interest on insufficient income tax instalments, 400 + Purchase of additional store fixtures bought at a going-out-of-business sale; expensed due to their small dollar amount,1,500 + Damages under a breach of contract suit initiated by a supplier, 1,700 = $58,100

For accounting purposes, the company added $22,000 to the capital asset account for leasehold improvements this year. (In other words, the company did not deduct this amount.) This amount represents the stores share of new landscaping of the strip mall premises that was undertaken after road work was done in front of the mall.

You have correctly determined that Ziggys Inc. is entitled to a $60,000 capital cost allowance amount claim in 2017.

Questions:

In good form (In good form in this case means you must start with income based on the financial statement and make adjustments)

1. Based on the foregoing information, compute the Division B income from business for tax purposes for Ziggys Inc. for its 2017 fiscal year. Show all calculations whether or not they seem relevant to the final answer.
2. In point form, indicate and explain why you did not include any of the above amounts in your calculation of employment income.