The following income statement was prepared (correctly, in Canadian dollars) for financial accounting purposes by MBA Incorporated.
Question:
The following income statement was prepared (correctly, in Canadian dollars) for financial accounting purposes by MBA Incorporated.
Income Statement
MBA Incorporated
For the period ending December 31, 2020
Sales $2,912,400
Cost of Goods Sold ( 873,720)
Gross Margin 2,038,680
Selling, General, and Administrative Expenses:
Appraisal costs (Note 1) $ 2,000
Political donations 5,400
Ontario corporation capital tax 1,300
Depreciation (Note 2) 24,000
Business Insurance 8,000
Pension plan contributions (Note 3) 10,000
Salaries and wages (Note 4) 218,000
Travel and entertainment (Note 5) 21,000
Donations to the United Way (a charity) 14,300
Other Miscellaneous (Note 6) 49,000 (353,000)
Net Income before Interest and Taxes $1,685,680
Interest (Note 7) $17,000
Provision for income taxes 828,225 (845,225)
Net Income $ 840,455
Notes:
- Appraisal costs consist of the following:
Determination of replacement cost for insuring assets $ 800
Determination of values for capital assets in anticipation of their sale of 1,200
$ 2,000
- The appropriate amount of CCA for the year is $33,400.
- Current services contributions to the money-purchase (defined contribution) registered pension plan (matched by employees) were paid in respect to the following executives (employment compensation for the year is shown in brackets):
President ($65,000) $ 6,000
Vice-President ($45,000) 4,000
$10,000
- Salary and wages include a payment of $24,000 to the son of the president. The president’s son is 12-year-old and does not perform services for the corporation. In addition, the salary and wages include management bonuses of $49,500 that were accrued as of December 31, 2020. $35,000 of these bonuses remains unpaid as of June 30, 2021.
- Entertainment included expenditures on meals and tickets to sporting events in the amount of $5,000 for client promotion purposes. It also includes $1,700 for maintenance of a yacht used 100% by the corporation in entertaining customers and suppliers. It also includes a December holiday banquet for all the employees, costing $6,100.
- Other miscellaneous includes $8,000 of inventory that a worker managed to remove during the year by taking it out in his lunch box. It also includes a life insurance policy that was taken out on the president’s life in order to provide funding for the company in the event of his death. Life insurance premiums on this policy were $4,600. Also included in a deduction in relation to a warranty reserve established by the company. The company is self-insured for this warranty (they pay any costs themselves). Last year the reserve was $76,000. This year they increased the reserve to $97,000. There were no warranty claims during the year.
- Interest expense consisted of the following:
Bond interest paid on funds borrowed to acquire fixed
assets for use in the business $ 4,700
Interest on deficient federal income tax installments 3,800
Interest on bank loan to acquire shares in a Canadian corporation 6,600
Interest on funds borrowed to renovate the house owned by the
President of the company 1,900
$17,000
Question:
1. providing all necessary calculations, prepare a reconciliation between net income per the audited income statement and income from business (Division B) for tax purposes.
2. Briefly, explain why any of the above-listed items were omitted from your reconciliation.
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-1259692406
18th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello