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Problem Twelve - 3

(Corporate Net And Taxable Income)

Vertin Ltd. is a Canadian public company that has always used a December 31 year end. How- ever, as December is a very busy time for their business activities, it has requested a change in their taxation year end to July 31, a date at which their business activity is at the low point for the year. They have presented this situation to the CRA and the Department has accepted their request for the change.

The change will be implemented during 2020, resulting in a short fiscal period ending July 31, 2020. The company's Income Statement, prepared in accordance with generally accepted accounting principles, for the period January 1, 2020, through July 31, 2020, is as follows:

The change will be implemented during 2020, resulting in a short fiscal period ending July 31, 2020. The companys Income Statement, prepared in accordance with generally accepted accounting principles, for the period January 1, 2020, through July 31, 2020, is as follows:

$1,796,600 1973,400) $ 823,200 Vertin Ltd. Income Statement 7 Month Period Ending July 31, 2020 Sales (All Within Canada) Cost Of Sales Gross Margin Other Expenses (Excluding Taxes): Wages And Salaries ($ 108,200) Cost Of Sales ( (194,200) Amortization ( 97,600) Rent ( 113,400) Interest Expense (13,200) Foreign Exchange Loss ( 7,600) Travel And Promotion (86,300) Bad Debt Expense ( 6,200) Warranty Expense ( 7,400) Charitable Donations ( 8,100) Other Operating Expenses (51,200) Operating Income Gain On Sale Of Investments Income Before Taxes (693,400) $ 129,800 7,800 $ 137,600 Other Information: 1. Wages and salaries includes a $28,000 bonus to Vertin Ltd's CEO. Because she anticipates retiring at the end of 2020, this bonus will not be paid until January 2022. 2. In determining the Cost Of Sales, the company deducted a $23,400 reserve for inventory obsolescence. 3. Amortization is on a Class 1 building, Class 8 furniture and fixtures, and Class 10 delivery vehicles. The following information is relevant for the determination of CCA for the seven month period ending July 31, 2020: Building The January 1, 2020, UCC for the building was $872,000. During 2020, the company spent $42,000 on improved flooring in all areas of the property. The building was not a new building when it was acquired. Furniture And Fixtures The January 1, 2020, UCC balance for Class 8 was $285,000. During 2020, new furniture was acquired at a cost of $40,600. Old furniture with a capital cost of $28,200 was sold for $17,600 Delivery Vehicles On January 1, 2020, the Class 10 UCC balance was $198,300. There were no additions or disposals in this class during the seven month period ending July 31, 2020. 4. The interest expense relates to a line of credit that was used to finance seasonal fluctua- tions in inventory. 5. The foreign exchange loss resulted from financing costs related to the purchase of merchandise in the United Kingdom. 6. The travel and promotion expense consisted of the following items: Business Meals And Entertainment $32,400 Hotels And Airfare 41,800 Golf Club Memberships 12,100 Total Travel And Promotion Expense $86,300 7 For accounting purposes, the company establishes a warranty reserve based on estimated costs. On January 1, 2020, the reserve balance was $8,200. On July 31, 2020, a new reserve was established at $7,400. 8. The accounting gain on the sale of investments is equal to the capital gain for tax purposes. 9. During the period January 1, 2020, through July 31, 2020, the company declared and paid dividends of $31,400 10. On January 1, 2020, the company has available a $24,600 non-capital loss carry forward and a $7,200 [(1/2)($14,400)] net capital loss carry forward. Required: Calculate the minimum Net Income For Tax Purposes and Taxable income for Vertin Ltd. for the seven month period ending July 31, 2020. Indicate the amount and type of any carry forwards that will be available for use in future years. $1,796,600 1973,400) $ 823,200 Vertin Ltd. Income Statement 7 Month Period Ending July 31, 2020 Sales (All Within Canada) Cost Of Sales Gross Margin Other Expenses (Excluding Taxes): Wages And Salaries ($ 108,200) Cost Of Sales ( (194,200) Amortization ( 97,600) Rent ( 113,400) Interest Expense (13,200) Foreign Exchange Loss ( 7,600) Travel And Promotion (86,300) Bad Debt Expense ( 6,200) Warranty Expense ( 7,400) Charitable Donations ( 8,100) Other Operating Expenses (51,200) Operating Income Gain On Sale Of Investments Income Before Taxes (693,400) $ 129,800 7,800 $ 137,600 Other Information: 1. Wages and salaries includes a $28,000 bonus to Vertin Ltd's CEO. Because she anticipates retiring at the end of 2020, this bonus will not be paid until January 2022. 2. In determining the Cost Of Sales, the company deducted a $23,400 reserve for inventory obsolescence. 3. Amortization is on a Class 1 building, Class 8 furniture and fixtures, and Class 10 delivery vehicles. The following information is relevant for the determination of CCA for the seven month period ending July 31, 2020: Building The January 1, 2020, UCC for the building was $872,000. During 2020, the company spent $42,000 on improved flooring in all areas of the property. The building was not a new building when it was acquired. Furniture And Fixtures The January 1, 2020, UCC balance for Class 8 was $285,000. During 2020, new furniture was acquired at a cost of $40,600. Old furniture with a capital cost of $28,200 was sold for $17,600 Delivery Vehicles On January 1, 2020, the Class 10 UCC balance was $198,300. There were no additions or disposals in this class during the seven month period ending July 31, 2020. 4. The interest expense relates to a line of credit that was used to finance seasonal fluctua- tions in inventory. 5. The foreign exchange loss resulted from financing costs related to the purchase of merchandise in the United Kingdom. 6. The travel and promotion expense consisted of the following items: Business Meals And Entertainment $32,400 Hotels And Airfare 41,800 Golf Club Memberships 12,100 Total Travel And Promotion Expense $86,300 7 For accounting purposes, the company establishes a warranty reserve based on estimated costs. On January 1, 2020, the reserve balance was $8,200. On July 31, 2020, a new reserve was established at $7,400. 8. The accounting gain on the sale of investments is equal to the capital gain for tax purposes. 9. During the period January 1, 2020, through July 31, 2020, the company declared and paid dividends of $31,400 10. On January 1, 2020, the company has available a $24,600 non-capital loss carry forward and a $7,200 [(1/2)($14,400)] net capital loss carry forward. Required: Calculate the minimum Net Income For Tax Purposes and Taxable income for Vertin Ltd. for the seven month period ending July 31, 2020. Indicate the amount and type of any carry forwards that will be available for use in future years