AFM202 Lecture 8: Lecture Notes for Class 8 -- Supplement

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coffeecoyote854

8 Dec 2015

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM202

Professor

Alan Mc Naughton

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Document Summary

Additional rules for the determination of business income. Income taxes are not deductible, and any interest charged on late income tax payments is also not deductible. Property tax on vacant land not used in the business is not deductible (instead, it is added to the acb of the land) Amounts paid for the investigation of a potential site for a building to be used in the business. These are deductible in computing taxable income under the same rules as in the case of an individual. This deduction comes into the computation after the determination of income for tax purposes in schedule 1. Deductions taken at this step of the calculations are known as division c deductions.

Related Questions

home / study / business / accounting / accounting questions andanswers / Carol Is A Single Mother Who Owns A Wholesale Auto PartsDistributorship. The Business Is Organized ... Question: Carol is asingle mother who owns a wholesale auto parts distributorship. Thebusiness is organiz... Carol is a single mother who owns awholesale auto parts distributorship. The business is organized asa sole proprietorship. Her business has advanced, and she can nolonger devote the time necessary to do her own tax return. Becauseshe always has prepared her own return, Carol is familiar with mosttax rules applicable to her business and personal affairs. However,she has come to you for advice with respect to a number of itemsshe paid during the current year. You are to determine whether shecan take a deduction for the expenditures in the current year. A,Carol purchased a small building on March 2 to use as a warehousefor her auto parts inventory. To purchase the building, sheborrowed $180,000 on a 30-year loan and paid $20,000 in additionalcash. Carol also incurred $3,200 in legal and other fees topurchase the building. The bank charged her $3,600 in points(prepaid interest) to obtain the loan. After acquiring thebuilding, Carol spent an additional $25,000 to renovate it for useas a warehouse. The $25,000 included $8,000 for painting. B, Carolhad her office building painted at a cost of $14,000 and paid$6,000 to have it landscaped. She paid for the building renovationin part a and the office building work by borrowing $60,000 onApril 1 at 7% interest. (See part f for details of the interestpayments.) C, On April 1, Carol prepaid a 1-year fire insurancepolicy on her 2 buildings. The policy cost $1,500, and the insurerrequired the prepayment. On September 1, Carol prepaid a $5,000,2-year maintenance contract on the buildings. D, Carol started aself-insured medical reimbursement plan for her employees thisyear. Based on actuarial assumptions, she deposited $13,500 in afund to pay employeesâ medical expenses. Actual payments from thefund totaled $11,200. E, Carol purchased a new automobile costing$32,000. She can document that her business use of the automobilecame to 90% and that her out-of-pocket operating costs totaled$3,600. F, Carol paid the following interest on business-relatedloans: Warehouse $15,300 Office building 4,000 Renovation loan5,400 The renovation loan was for $60,000. Because she spent only$45,000 renovating the new building and painting and landscapingthe old one, she used the additional $15,000 to purchase city ofSeattle bonds with a yield of 6%. G, Carol became active inpolitics and contributed $1,000 to the presidential campaign of anindependent candidate. She made the contribution because shebelieved that, if elected, the candidate would institute policiesbeneficial to her business. The candidate lost the election andimmediately started a grassroots lobbying organization. The purposeof the organization is to keep track of elected officialsâ campaignpromises and report to the public when they vote contrary to theirstated campaign promises. Carol paid $1,600 in dues to join thelobbying organization. H, Carolâs oldest son began college duringthe current year. She paid his tuition and living expenses, a totalof $13,300, out of the companyâs checking account. During thesummer, her son worked for the business, and Carol paid him $4,300,the same amount she paid other college students working during thesummer. Because she consults her son from time to time on theoperation of the business, she thinks that at least some of the$13,300 should be deductible. I, Carol has always itemized herdeductions. This year, her mother and father retired and could nolonger afford the mortgage interest and property taxes on theirhome. Rather than have them sell the house, Carol made the paymentsfor them. They received a statement from their bank indicating thata total of $8,125 in mortgage interest and taxes were paid in thecurrent year. Carol knows that mortgage interest and property taxesare deductible as itemized deductions and would like to add them toher personal interest and property tax payments. J, Because of thesuccess of her business, Carol has received many offers to investin various business ventures. One offer was to establish a chain ofnursing homes in Florida. Carol spent two weeks in Floridaevaluating the prospects of the proposed venture and incurred costsof $2,100. After careful consideration, she decided the venture wastoo risky and decided not to expand into the health-carebusiness.

cyangnat414

Complex Balance Sheet

Presented below is the unaudited balance sheet as of December31, 2016, prepared by Zeus Manufacturing Corporationâsbookkeeper.

Zeus Manufacturing Corporation Balance Sheet for the Year Ended December 31, 2016
Assets		Liabilities and Shareholders' Equity
Cash	$225,000	Accounts payable	$133,800
Accounts receivable (net)	345,700	Mortgage payable	900,000
Inventories	560,000	Notes payable	500,000
Prepaid income taxes	40,000	Lawsuit liability	80,000
Investments	57,700	Income taxes payable	61,200
Land	450,000	Deferred tax liability	28,000
Building	1,750,000	Accumulated depreciation	420,000
Machinery and equipment	1,964,000	Total Liabilities	$2,123,000
Goodwill	37,000	Common stock, $50 par; 40,000 shares issued	$2,231,000
Total Assets	$5,429,400	Retained earnings	1,075,400
		Total Shareholders' Equity	$3,306,400
		Total Liabilities and Shareholders' Equity	$5,429,400

Your company has been engaged to perform an audit, during whichyou discover the following information:

Checks totaling $14,000 in payment of accounts payable weremailed on December 31, 2016, but were not recorded until 2017. Latein December 2016, the bank returned a customerâs $2,000 checkmarked "NSF," but no entry was made. Cash includes $100,000restricted for building purposes.

Included in accounts receivable is a $30,000 note due onDecember 31, 2019, from Zeusâs president.

During 2016, Zeus purchased 500 shares of common stock of amajor corporation that supplies Zeus with raw materials. Total costof this stock was $51,300, and fair value on December 31, 2016, was$47,000. The decline in fair value is considered temporary. Zeusplans to hold these shares indefinitely.

Treasury stock was recorded at cost when Zeus purchased 200 ofits own shares for $32 per share in May 2016. This amount isincluded in investments.

On December 31, 2016, Zeus borrowed $500,000 from a bank inexchange for a 10% note payable, maturing December 31, 2021. Equalprincipal payments are due December 31 of each year beginning in2017. This note is collateralized by a $250,000 tract of landacquired as a potential future building site, which is included inland.

The mortgage payable requires $50,000 principal payments, plusinterest, at the end of each month. Payments were made on January31 and February 28, 2017. The balance of this mortgage was due June30, 2017. On March 1, 2017, prior to issuance of the auditedfinancial statements, Zeus consummated a noncancelable agreementwith the lender to refinance this mortgage. The new terms require$100,000 annual principal payments, plus interest, on February 28of each year, beginning in 2018. The final payment is due February28, 2025.

The lawsuit liability will be paid in 2017.

Of the total deferred tax liability, $5,000 is considered acurrent liability.

The current income tax expense reported in Zeusâs 2016 incomestatement was $61,200.

The company was authorized to issue 100,000 shares of $50 parvalue common stock.

Required:

Prepare a corrected classified balance sheet as of December 31,2016.

Zeus Manufacturing Corporation Balance Sheet December 31, 2016
Assets
Current Assets:
Cash		$
Accounts receivable (net)
Inventories
Total current assets			$
Long-Term investment, at fair value
Property, Plant, and Equipment (at cost):
Land		$
Building	$
Machinery and equipment
Total
Less: Accumulated depreciation
Total property, plant, and equipment
Intangible Asset:
Goodwill
Other Assets:
Cash restricted for building purposes		$
Officer's note receivable
Land held for future building site
Total Assets			$
Liabilities
Current Liabilities:
Accounts payable		$
Current installments of long-term debt
Lawsuit liability
Income taxes payable
Deferred tax liability
Total current liabilities			$
Long-Term Debt:
Mortgage payable		$
Notes payable
Deferred tax liability
Total long-term debt
Total Liabilities			$
Shareholders' Equity
Contributed Capital:
Common stock, $50 par value		$
Additional paid-in capital
Total paid-in capital		$
Retained earnings
Accumulated Other Comprehensive Loss:
Unrealized decrease in value of long-term investment
Total		$
Less: Cost of treasury stock
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity			$

browncattle687

Norton Forms Excel Problem (dont have the excel form)

Norton Forms is a Canadian controlled private corporationspecializing in designing and printing custom business forms. It isowned by Viola Norton. For the taxation year ended December 31,2018, Ms. Norton 's daughter, Linda, who works in the business, hascalculated a Net Income for Norton Forms of $576,183. Incalculating this figure, Linda used generally accepted accountingprinciples.

Linda has produced the following Income Statement for the yearended December 31, 2018:

Norton Forms Inc.

Income Statement?

Year ending December 31, 2018

Sales---$$ 7,578,903

Cost of Goods Sold ---$5,468,752

Gross Profit ---$2,110,151

Expenses

General and Admin ---$852,000

Amortization Expense ---$550,000

Interest ---$8,500-------------- Total $1,410,500

Operating Income -------------$699,651

Other Income:

Loss on Disposal of Intangible Assets ---$ (17,000)

Interest Income?---$110,532

Income before income taxes ---$793,183

Income Taxes

Current ---$182,000

Future---$ 35,000 -----------Total $217,000

Net Income ------------------ Total $576,183

During your review of Linda's work and last year's tax returnfor the corporation, you have made the following notes:

1. In theaccounting records, the Allowance for Doubtful Accounts was $25,000at December 31, 2018, and $20,000 at December 31, 2017.

During 2018, the company had actual write-offs of $11,750. As aresult, the accounting Bad Debt Expense was $16,750. This amount isincluded in General and Admin expenses on the Income statement.

2. A reviewof the listing of receivables (for tax purposes), indicates thatthe actual items that may be uncollectible total $15,000 atDecember 31, 2018. In 2017, the company deducted a reserve for baddebits of $13,000 for tax purposes.

3. Generaland Admin Expenses include:

a) Donations to registeredcharities $27,000

b) Accrued Bonuses - Accrued Sept 1, 2018. Paid June 15,2019 $78,000

Meals and entertainment costs:

c) $1,000 per month for premium membership at golf club forViola $12,000

d) $200 per month for membership at golf club forsalespeople $2,400

e) Meals while entertaining clients $32,000

f) Food costs for Viola's personal chef for her meals athome $5,000

g) Annual summer BBQ for all staff $6,000

h) Sponsorship of local baseball team where company name isprominently displayed on front of jersey $15,000

i) Advertising in a US trade magazine directed at USclients $ 100,000

j) New software purchased October 1, 2018. ($13,000 forapplications and $25,000 for systems) $38,000

k) Accounting and legal fees for amended to the articles ofincorporation $6,000

l) Costs to attend annual convention of finger knitters inThailand. While at the convention, Viola was sure to hand outbusiness cards and talk to other attendees about her business withthe intention of claiming the convention as a businessexpense. $17,000

4. Interest expense consists of the following:

a) Interest expense - operations $ 5,000

b) Penalty and interest for late and insufficient instalmentpayments $ 2,000

c) Interest on late payment of municipal property taxes$1,500

5. Travel costs (included in general and admin expenses) includeboth air travel and travel reimbursement to employees for businesstravel. The company policy is to reimburse employees $0.58 perkilometer for the business use of their automobiles. During theyear, seven employees each drove 4,000 on employment relatedactivities and one employee drove 7,500 kilometers. None of thekilometer based allowances are required to be included in theincome of the employees.

6. Maximum CCA has always been taken on all assets. Theundepreciated capital cost balances at January 1, 2018 were asfollows:

Class 1 (4%)------$650,000

Class 8-----------$95,000

Class 10.1------$17,850

Class 14-----$68,000

Class 14.1-----$18,098

Class 53-----$135,000

Class 44-----$65,000

7. There was a loss on disposal of a limited life license toproduce copyrighted materials for a major distributor. This licenseoriginally cost the company $95,000, and it was sold for $63,000 in2018. The book value of the license at the time of sale was$80,000. When the license was sold, it was the only asset in itsCCA class. The loss was claimed as a loss on disposal of intangibleassets on the Income Statement.

8- Purchases and sales of equipment and other capital assetsmade during 2018 were as follows. (Note: any items discussed inother sections are included in this list as well)

A)The company purchased land and constructed a new building onit during the year. The building was used 95% for manufacturing andprocessing. The cost of the land was $350,000, and the buildingcost $475,000 to construct.

B)The company purchased a new set of furniture for the receptionarea for $1,200.

C)Some outdated desks used by the finance department with a costof $5,000 were sold for proceeds of $3,500.

D)Landscaping of 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 waspurchased for $90,000. This car replaced the only other existingcompany car, which was purchased in 2013 for $95,000. The old carwas sold for $60,000.

F)A fence around the new building cost $52,000.

G)New software was purchased: $13,000 for Applications and$25,000 for Systems.

9- The company sold some shares that had been purchased severalyears ago. The capital gain on these shares was $152,708. Lindadidn't know how to account for this, so she credited the entireamount to retained earnings.

Required:

Determine Norton Forms' minimum Net Income for Tax Purposes forthe year ending December 31, 2018. Ignore GST/HST/PSTimplications.

Using Excel spreadsheet, indicate your rationale for thetreatment of all information given. (dont have the excel, dont knowhow to submit)

ambergiraffe255

AFM202 Lecture 8: Lecture Notes for Class 8 -- Supplement

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