In November, 2017, after discovering that her bookkeeper, Ponzi Madoff, had been defrauding her, Angela fired him and took over the bookkeeping responsibilities herself, despite having a limited knowledge of accounting. She has produced the following income statement and miscellaneous financial information for the year ended December 31, 2017 and needs your help.
Angie's Amazing Getups Incorporated
Income Statement
Year Ending December 31, 2017
Sales $7,578,903
Cost Of Goods Sold (5,468,752)
Gross profit $2,110,151
Expenses:
General And Administrative Expenses ($852,000)
Amortization Expense ( 550,000)
Interest (8,500) (1,410,500)
Operating Income $ 699,651
Other Income:
Loss On Disposal Of Limited Life Licence ( 17,000)
Interest Income 110,532
Income Before Income Taxes $ 793,183
Income Taxes
Current ($182,000)
Future ( 35,000) ( 217,000)
During your review of Angela's work and last year's tax return for the corporation, you have made the following notes.
1. In the accounting records, the Allowance For Doubtful Accounts was $25,000 at December 31, 2017, and $20,000 at December 31, 2016. During 2017, the company had actual write-offs of $11,750. As a result, the accounting Bad Debt Expense was $16,750. This amount is included in General and Administrative Expenses on the Income Statement.
A review of the listing of receivables (for tax purposes), indicates that the actual items that may be uncollectible total $15,000 at December 31, 2017. In 2016, the company deducted a reserve for bad debts of $13,000 for tax purposes.
2. General And Administrative Expenses include:
Donations To Registered Charities $27,000
Accrued Bonuses - Accrued September 1, 2017, Paid June 15, 2018 78,000
Meals And Entertainment Costs:
$1,000 Per Month For Premium Membership At Golf Club For Angie 12,000
$200 Per Month For Memberships At Golf Club For Salespeople 2,400
$32,000 For Meals While Entertaining Clients 32,000
$5,000 In Food Costs For Angie's Personal Chef For Her Meals At Home 5,000
$6,000 For Annual Summer BBQ For All Staff 6,000
Sponsorship Of Various Theatre Productions That Use Angie's Costumes 100,000
Advertising In A U.S. Theatre Ma azine Directed At U.S. Clients 15,000
New Software Purchased October 1, 2017
($13,000 For Applications And $25 000 For Systems) 38,000
Accounting And Legal Fees For Amended Articles Of Incorporation 6,000
Costs To Attend Annual Convention Of Costume Designers Held In Thailand 17,000
3. Interest Expense consists of the following:
Interest Expense - Operations $5,000
Penalty And Interest For Late And Insufficient Instalment Payments 2,000
Interest On Late Payment Of Municipal Property Taxes 1,500
4. Travel costs (included in General and Administrative costs) include both air travel and travel reimbursement to employees for business travel. The company policy is to reim¬burse employees $0.58 per kilometer for the business use of their automobiles. During the year, seven employees each drove 4,000 kilometers on employment related activities and one employee drove 7,500 kilometers. None of the kilometer based allowances are required to be included in the income of the employees.
5. Maximum CCA has always been taken on all assets. The undepreciated capital cost balances at January 1, 2017 were as follows:
Class 1 (4%) $650,000
Class 8 95,000
Class 10.1 17,850
Class 14 68,000
Class 14.1 Nil
Class 44 65,000
Class 53 135,000
6. During 2017, a limited life licence to produce costumes based on a popular theme park was sold for $63,000. The original cost of this licence was $95,000 and its net book value at the time of sale was $80,000. The licence was the only asset in Class 14.
7. Purchases and sales of equipment and other capital assets made during 2017 were as follows (note: some items are discussed in other sections of this problem). All amounts were capitalized for accounting purposes:
a. The company purchased land and constructed a new building on it during the year. The building will be used 95% for manufacturing and processing. The cost of the land was $350,000, and the building cost $475,000 to construct.
b. The company purchased a new set of furniture for the reception area for $1,200.
c. Some outdated desks used by the finance department with a cost of $5,000 were sold for proceeds of $3,500.
d. Landscaping of the grounds around the new building cost $35,000. This amount was capitalized for accounting purposes.
e. A company car for use by the president of the company was purchased for $90,000. This car replaced the only other existing company car, which was purchased in 2015 for $95,000. The old car was sold for $60,000.
f. A fence around the new building, high enough to prevent the paparazzi from taking pictures of Angela while she was at the office cost $52,000.
8. The company sold some shares that had been purchased several years ago. The capital gain on these shares was $152,708. Angela didn't know how to account for this, so she credited the entire amount to retained earnings.
9. Included in the financial statement income is income earned in the United States. The amounts reported in the financial statements are net of the tax paid, because Angela was unsure of the appropriate accounting treatment. All amounts are reported in Canadian dollars. The foreign income consisted of:
a. Foreign business income of $70,000. US tax returns have been filed, and the US taxes paid on this amount totals $6,000.
b. Foreign portfolio dividend income of $15,000. Foreign taxes of $2,000 have been paid on this dividend income.
10. The investment Income account balance on the Income Statement consists of the foreign dividend income (point 10) and the following Canadian source investment income:
Interest on long term investments $56,532
Eligible dividend, on bank shares $16,000
Non-eligible dividend from, Snodgrass Ltd. $25,000
Angie's Amazing Getup, Incorporated owns 8 percent of the shares of Snodgrass Ltd., a very profitable CCPC owned by Angela's mother. Snodgrass Ltd. received no dividend refund from the payment of dividends in 2017.
11. Except for the investment income noted in points 10 and 11, and any additional investment income you may calculate, all income is Canadian Active Business Income,
12. included in the income of the company are manufacturing and processing profits. It has been determined that manufacturing fining and processing profits as determined under the Income lax Regulations are $65,000.
13. The corporation has permanent establishments in Ontario and the United States. Its gross revenue and salary and wages information is as follows:
Gross Revenue Salary and Wages
Ontario 73.8% 81.9
United States 26.2% 10.9%
14. As Angela did not know how to deal with the dividends paid to her personally by Angie's Amazing Getups Incorporated, she included them in General And Administrative Expenses. A total of $60,000 in non -eligible dividends were paid to her during 2017.
15. The balances in the tax accounts on December 31, 2016 were as follows:
Charitable donation carry forward $ 3,500
Non - capital loss carry forward 52,500
Net capital loss carry forward [(1/2)($17,(666)] 8,833
Refundable dividend tax on hand 40,500
Dividend refund for 2016 9,500
GRIP 76,500
None of the dividends paid in 2016 were designated eligible.
Required:
Show all of the calculation used to provide the following required information, including those for which the result is nil.
Ignore GST/HST/PST implications.
Determine Angie's Amazing Getups incorporated's
A. minimum Net Income For Tax purposes and Taxable income for the year ending December 31, 2017.
B. Part I Tax Payable for the year ending December 31, 2017. Any percentages used in your calculations should be rounded to one decimal point. For the purposes of dealing with any foreign tax credits that the company is eligible for, assume that the foreign tax credit is equal to the foreign tax paid when determining the amount of the small business dedication and the manufacturing and processing profits dedication.
C. December 31, 2017 balance in the refundable Dividend Tax on Hand account.
D. Minimum federal Tax Payable for the year ending December 31, 2017. This should include both part I and Part IV Tax Payable, net of any dividend refund. Actual foreign tax credits should be calculated in order to determine the final balance of taxes owing by the company.
E. December 31, 2017 balance in the GRIP account.
*Use byrd and chen's Canadian tax principles