Assignment task: Marcus Laramore operates a proprietorship that sells sports memorabilia. It has been in operation for several years and has always used a taxation year that ends on December 31.
Marcus' business does not have any debt and he is not required to provide anyone with financial statements, so he has always calculated his Net Income for Taxation Purposes himself. He likes this because it has saved him the cost of hiring an accountant or bookkeeper.
For the year ending December 31, 2018, using his usual tax procedures, Marcus calculated his net business income to be $547,600.
Business has been booming and Marcus is debating opening a second location. In order to do so, Marcus would require a loan from a financial institution, and would subsequently be required to create business financial statements, as per a conversation Marcus had with a loan officer at his local bank.
Before requesting a business loan from his financial institution for expansion, Marcus asked you to assist him in calculating his Net Income for Accounting Purposes from his Net Income for Taxation Purposes stated above.
Other Information:
In late December 2018, Marcus spent $16,000 on landscaping the grounds around his original location. Given the late date at which this work was done, no amortization would be required for accounting purposes with respect to these costs for 2018. It is expected that these landscaping improvements will last at least 5 years.
Marcus owns 3 delivery vehicles with a capital cost of $18,000 each. They are the only assets in Class 10 which has an Undepredciated Capital Cost (UCC) balance of $38,000 on January 1, 2018. During 2018, the 3 vehicles were sold for a total of $26,000. If the vehicles had been subject to financial accounting amortization, their net book value at the time of sale would have been $10,000 each for a total of $30,000.
In the Net Business Income calculation based on tax procedures, Marcus deducted $7,000 in business meals and entertainment costs.
His daughter, Marigold, who is a computer engineering student at a local university, designed Marcus' business website 4 years ago, and provides weekly tech support to the website. This past year, Marcus paid Marigold $13,000 for her help. This amount was deducted in his Net Business Income calculation.
During 2018, Marcus sold Class 8 assets for $28,200. These assets had a capital cost of $36,100 and were not the last assets in Class 8. There was a positive balance in Class 8 at the end of the year. If these assets had been subject financial accounting rules, their net book value would have been $26,000.
For tax purposes, the ending inventories of the business were carried at market value of $71,000. Their total cost, determined on a first-in-first-out basis, was $77,500.
Marcus deducted $61,100, the maximum amount of Capital Cost Allowance (CCA) that was available for the year. You have determined that amortization under financial accounting rules would have been $58,200.
Marcus spent $3,250 advertising on a U.S. television station. The commercials were directed at Canadian resident viewers.
One of Marcus's workers was skimming cash from the register and it turned out the employee stole $5,000 from Marcus. Once Marcus found out what was happening, he immediately terminated the employment contract with that employee.
Marcus believes in supporting the local community and his business made charitable donations of $6,500 in 2018.
Marcus' daughter used to play competitive basketball and Marcus has been sponsoring a local girls basketball team for years. Marcus provided uniforms to the team he sponsors, and his company's name is splashed on the front of the jersey and his logo is present on the side of the shorts. The cost of the uniforms totalled $3,000 in 2018.
As the business is unincorporated, no taxes were deducted in calculating Net Business Income.
Required: Determine the 2018 Net Business Income for Accounting Purposes based the company's Net Business Income for Taxation Purposes. Do not include any tax that Marcus will have to pay on this income in your calculations. If you do not use some of the items included in other information, indicate why this is the case.