ACCT226 Chapter 6 Problem 3 PDF

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Summary

Coretta Kirkman is the sole proprietor of an unincorporated business that sells security related products to both retail customers and to building contractors. The business began operations on January 1, 2019. The business will use a December 31 end.The following information relates to the year endi...

Description

Coretta Kirkman is the sole proprietor of an unincorporated business that sells security related products to both retail customers and to building contractors. The business began operations on January 1, 2019. The business will use a December 31 end. The following information relates to the year ending December 31, 2019: •

Cash sales of delivered merchandise total $375,000.

•

Account sales of delivered merchandise total $130,000.

•

•

•

As of December 31, uncollected Accounts Receivable balances total $55,000. Coretta expects $6,000 of the accounts to become uncollectible.

Coretta’s business receives payments of $36,000 for merchandise to be delivered in 2020.

During 2019, Coretta’s business installs a comprehensive security system in a 462 unit condominium development. The gross profit on this sale was $12,500. Because of the size of the contract, Coretta agrees to accept payment in three instalments as follows:

2019

$23,000

2020

32,000

2021

18,000

Total Contract Price

$73,000

The following information relates to the year ending December 31, 2020:

•

A total of $5,800 of accounts receivable were written off during the year.

•

All of the merchandise on which 2019 deposits were received was delivered.

•

The $32,000 instalment on the condominium project was received.

•

Sales of delivered merchandise and services totaled $520,000, with $150,000 of this amount being on account. As of December 31, $52,000 of the account sales had not been collected. Coretta anticipates that $7,500 of these outstanding accounts will not be collectible.

•

In addition to sales of delivered merchandise, the business received deposits on orders in the amount of $29,000. This merchandise is scheduled to be delivered in early 2021.

Required: How would the preceding information affect the calculation of Coretta Kirkman’s business income for the 2019 and 2020 taxation years? Include the full details of your calculations for each year, not just the net result for each year. Ignore GST/PST implications.

The results for the 2 years would be as follows:

2019 Cash Sales

$375,000

Cash Sales ($520,000 - $150,000)

Sales On Account

2020

$370,000

130,000

150,000

Reserve For Doubtful Debts: Add Prior Year Reserve

Nil

Deduct Current Year Reserve

( 6,000)

( 7,500)

Deduct Actual Write-Offs

Nil

( 5,800)

Advances From Customers

36,000

6,000

29,000

Reserve For Undelivered Merchandise: Add Prior Year Reserve

Nil

Deduct Current Year Reserve

( 36,000)

Gross Profit On Condominium Project

12,500

36,000 ( 29,000)

Nil

Reserve For Unpaid Amounts: Add Prior Year Reserve

Nil

8,562

Deduct Current Year Reserve* {[$12,500][($73,000 - $23,000)  $73,000]}

( 8,562)

{[$12,500][($73,000 - $55,000)  $73,000]} Net Effect

( 3,082) $502,938

$554,180

*As some of the proceeds on the sale of unused materials are not due until 2 years after the date of the sale, a reserve for unpaid amounts can be deducted. The 3 year time limit is not relevant as the full balance is paid off prior to the end of that period....