ACCT226 Chapter 6 Problem 10 PDF

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Summary

ACCT226 Chapter 6 Problem 10...

Description

For the year ending December 31, 2019, the Income Statement of Markham Ltd., prepared in accordance with generally accepted accounting principles, is as follows:

Revenues

$973,000

Expenses: Cost Of Goods Sold

($272,000)

Selling And Administrative Costs

( 132,000)

Amortization Expense

( 156,000)

Other Expenses

( 137,000)

Income Before Tax Expense

( 697,000) $276,000

Income Tax Expense: Current

($ 97,000)

Future

( 32,000)

Net Income

( 129,000) $147,000

Other Information:

1.

The Company spent $6,000 during the year on landscaping for its new building. For accounting purposes this was treated as an asset. The Company will not amortize this balance as it believes the work has an unlimited life.

2.

Selling And Administrative Costs include $15,000 in business meals and entertainment.

3.

Selling And Administrative Costs include membership fees for several employees in a local golf and country club. These fees total $3,400.

4.

Other Expenses include contributions to registered charities of $3,700.

5.

Other Expenses includes bond discount amortization of $2,500.

6.

During 2019, Markham Ltd. acquired a competing business at a price that included goodwill of $70,000. For accounting purposes, there has been no impairment or write-down of the goodwill since its purchase.

7.

As the Company expects to issue more shares during 2020, it made a number of amendments to its articles of incorporation in 2019 and included the legal costs in Other Expenses. These costs totalled $6,000.

8.

On January 1, 2019, the Company has UCC balances for its tangible assets as follows:

Class 1

$400,000

Class 8

575,000

Class 10

45,000

Class 13

68,000

The Class 1 balance relates to a single building acquired in 2000 at a cost of $550,000. It is estimated that the value of the land at this time was $50,000. On February 1, 2019, this building is sold for $612,000. It is estimated that the value of the land is unchanged at $50,000. In the accounting records, this real property was carried at $507,000, $457,000 for the building and $50,000 for the land. The resulting gain on the building is included in the accounting revenues. The old building is replaced on February 15, 2019 with a new building acquired at a cost of $683,000 of which $60,000 is allocated to land. The Company chose not to put the new building into a separate Class 1 so it does not qualify for the 6 percent CCA rate. No elections are made with respect to the replacement of the building. There are no dispositions of Class 8 assets during the year. However, there are acquisitions in the total amount of $126,000. As the Company has decided to lease all of its vehicles in the future, all of the assets in Class 10 are sold during the year. The capital cost of these assets was $93,000 and the proceeds of disposition amounted to $37,000. The net book value of these assets was $52,000 and the resulting accounting loss of $15,000 was included in Other Expenses. The Class 13 balance relates to a single lease that commenced on January 1, 2017. The lease has an initial term of seven years, with two successive options to renew for three years each. Expenditures on this leasehold were $50,000 in 2017 and $27,000 in 2018. There were no further expenditures in 2019. The write-off of these expenditures for accounting purposes is included in Amortization Expense.

9.

Other Expenses includes interest on late income tax instalments of $500 and on late municipal tax payments of $275.

10. Markham Ltd. has always deducted the maximum CCA allowable in each year of operation.

Required: Determine Markham Ltd.’s 2019 minimum Net Income For Tax Purposes. In addition, calculate the January 1, 2020 UCC for all of Markham Ltd.’s CCA classes. The calculation of Markham Ltd.’s Net Income For Tax Purposes would be as follows:

Accounting Net Income

$147,000

Additions: Amortization Expense (Income Statement)

156,000

Income Tax Expense (Income Statement)

129,000

Item 2 - Non-Deductible Meals And Entertainment (50% of $15,000)

7,500

Item 3 - Golf Club Membership Fees

3,400

Item 4 - Contributions To Registered Charities

3,700

Item 5 - Bond Discount Amortization

2,500

Item 7 - Articles Of Incorporation Amendment Costs

6,000

Item 8 - Taxable Capital Gain On Sale Of Building [(1/2)($562,000 - $500,000)]

31,000

Item 8 - Gain on Land ($50,000 - $50,000) Item 8 - Accounting Loss On Class 10 Assets Item 9 - Interest On Late Income Tax Instalments Subtotal

Nil 15,000 500 $501,600

Deductions: Item 1 - Landscaping Costs

( 6,000)

Item 8 - Accounting Gain On Sale Of Building ($562,000 - $457,000) (Land ACB = $50,000) Capital Cost Allowance (Note One) Item 8 - Terminal Loss (Note One)

( 105,000) ( 189,880) ( 8,000)

Net Income For Tax Purposes

$192,720

Note One Maximum CCA and other related inclusions and deductions can be calculated as follows:

Class 1

$400,000

January 1, 2019 Class 1 Balance Addition ($683,000 - $60,000)

$623,000

Disposition - Lesser Of: •

Proceeds = $562,000

•

Capital Cost = $500,000

( 500,000)

AccII Adjustment [(50%)($123,000)]

123,000

61,500

CCA Base

$584,500

CCA At 4 Percent

( 23,380)

AccII Adjustment Reversal

( 61,500)

January 1, 2020 UCC Balance

$499,620

Class 8

January 1, 2019 Class 8 Balance Additions AccII Adjustment [(50%)($126,000)]

$575,000 126,000 63,000

CCA Base

$764,000

CCA At 20 Percent

( 152,800)

AccII Adjustment Reversal

( 63,000)

January 1, 2020 UCC Balance

$548,200

Class 10

January 1, 2019 Class 10 Balance

$45,000

Disposition - Lesser Of: •

Proceeds = $37,000

•

Capital Cost = $93,000

( 37,000)

Positive Balance With No Remaining Assets = Terminal Loss

$ 8,000

Terminal Loss

( 8,000)

January 1, 2020 UCC Balance

Nil

Class 13

January 1, 2019 Class 13 Balance

$68,000

2019 CCA: 2017 Expenditures ($50,000  10 Years)

( 5,000)

2018 Expenditures ($27,000  9 Years)

( 3,000)

January 1, 2020 UCC Balance

$60,000

Class 14.1

The required calculations for 2019 are as follows:

2019 Additions ($70,000 + $6,000)

$76,000

AccII Adjustment [(50%)($76,000)]

38,000

CCA Base CCA At 5 Percent

$114,000 ( 5,700)

AccII Adjustment Reversal

( 38,000)

January 1, 2020 UCC Balance

$ 70,300

Summary Of CCA Results (Not Required) The maximum 2019 CCA and January 1, 2020 UCC balances can be summarized as follows:

Class

Maximum CCA

UCC

Class 1

$ 23,380

$ 499,620

Class 8

152,800

548,200

Class 10 (Terminal Loss = $8,000)

Nil

Nil

Class 13

8,000

60,000

Class 14.1

5,700

70,300

Total

$189,880

Other Notes

•

While there is a specific prohibition against the deduction of interest on late income tax instalments, there is no equivalent restriction on interest due to late municipal taxes, and it would appear that these amounts are deductible.

•

As the old building is not a rental property, the new building can be added to the same Class 1 that contained the old building. If this were not the case, this transaction would have resulted in recapture of CCA on the disposition of the old building....