Morton Forms is a Canadian controlled private corporation owned by Viola Morton. For the taxation year ended December 31, 2016,
Morton Forms is a Canadian controlled private corporation owned by Viola Morton. For the taxation year ended December 31, 2016, Ms. Morton's daughter, Linda, who works in the business, has calculated a Net Income for Morton Forms of $576,183. In calculating this figure,
Linda used generally accepted accounting principles.
Linda has produced the following Income Statement for the year ended December 31, 2016:
Morton Forms Inc.
Income Statement Year ending December 31, 2016
Sales $ 7,578,903
Cost of Goods Sold 5,468,752
Gross Profit 2,110,151
General and Admin $ 852,000
Amortization Expense 550,000
Interest 8,500 1,410,500
Operating Income 699,651
Loss on Disposal of Intangible Assets (17,000)
Interest Income 110,532
Income before income taxes 793,183
Future 35,000 217,000
Net Income $ 576,183
During your review of Linda’s work and last year’s tax return for the corporation, you have made the following notes:
1. In the accounting records, the Allowance for Doubtful Accounts was $25,000 at December 31, 2016, and $20,000 at December 31, 2105. During 2016, the company had actual write-offs of $11,750. As a result, the accounting Bad Debt Expense was $16,750. This amount is included in General and Admin expenses on the Income statement.
2. A review of the listing of receivables (for tax purposes), indicates that the actual items
that may be uncollectible total $15,000 at December 31, 2106. In 2015, the company
deducted a reserve for bad debits of $13,000 for tax purposes.
3. General and Admin Expenses include:
a) Donations to registered charities 27,000
b) Accrued Bonuses – Accrued Sept 1, 2016. Paid June 15, 2017 78,000 Meals and entertainment costs:
c) $1,000 per month for premium membership at golf club for Viola 12,000
d) $200 per month for membership at golf club for salespeople 2,400
e) Meals while entertaining clients 32,000
f) Food costs for Viola’s personal chef for her meals at home 5,000
g) Annual summer BBQ for all staff 6,000
h) Sponsorship of local baseball team where company name is
prominently displayed on front of jersey 15,000
i) Advertising in a US trade magazine directed at US clients 100,000
j) New software purchased October 1, 2016. ($13,000 for applications and $25,000 for systems) 38,000
k) Accounting and legal fees for amended to the articles of incorporation 6,000
l) Costs to attend annual convention of finger knitters in Thailand.
While at the convention, Viola was sure to hand out business cards and talk to other attendees about her business with the intention of
claiming the convention as a business expense. 17,000
4. Interest expense consists of the following:
a) Interest expense - operations 5,000
b) Penalty and interest for late and insufficient instalment payments 2,000
c) Interest on late payment of municipal property taxes 1,500
5. Travel costs (included in general and admin expenses) include both air travel and travel reimbursement to employees for business travel. The company policy is to reimburse employees $0.58 per kilometer for the business use of their automobiles. During the year, seven employees each drove 4,000 on employment related activities and one employee drove 7,500 kilometers. None of the kilometer based allowances are required to be included in the income of the employees.
6. Maximum CCA has always been taken on all assets. The undepreciated capital cost balances at January 1, 2016 were as follows:
Class 1 (4%) $650,000
Class 8 95,000
Class 10.1 17,850
Class 14 68,000
Class 291 135,000
Class 44 65,000
1In 2012, used manufacturing and processing equipment was purchased for $4,750,000 from another clothing manufacturer who had gone bankrupt. CCA on this equipment was fully claimed in 2013, 2014 and 2015. Last year, additional manufacturing and processing equipment was purchased for $180,000.
7. There was a loss on disposal of a limited life license to produce copyrighted materials for a major distributor. This license originally cost the company $95,000 , and it was sold for $63,000 in 2016. 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 its CCA class. The loss was claimed as a loss on disposal of intangible assets on the Income Statement.
8. The cumulative eligible capital balance at January 1, 2016 was $18,098. Three-quarters of the $30,000 cost of incorporating the business was put in the CEC account in 2012. No other items were included in this account prior to the current year.
9. Purchases and sales of equipment and other capital assets made during 2016 were as follows. (Note: any items discussed in other sections are included in this list as well)
a. The company purchased land and constructed a new building on it during the year. The building was used 95% for manufacturing and processing. The cost of the land was $350,000, and the building cost $475,000 to construct.
b. The company purchased a new set of furniture for the reception area for $1,200.
c. Some outdated desks used by the finance department with a cost of $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 was purchased for $90,000.
This car replaced the only other existing company car, which was purchased in 2013 for $95,000. The old car was 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.
10. The company sold some shares that had been purchased several years ago. The capital gain on these shares was $152,708. Linda didn’t know how to account for this, so she credited the entire amount to retained earnings.
Determine Morton Forms’ minimum Net Income for Tax Purposes for the year ending December 31, 2106. Ignore GST/HST/PST implications. Using the supplied formatted Excel spreadsheet, indicate your rationale for the treatment of all information given.