You have been assigned to the audit team for B.B. JAMS Ltd., one of your significant clients.

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You have been assigned to the audit team for B.B. JAMS Ltd., one of your significant clients. Below is the income statement prepared by the company's accountant for the December 31, 2012 year end.
B.B. JAMS LIMITED
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012
Sales.................................................................. $147,840,000
Cost of sales (Note (1)) ........................................... (119,859,000)
Gross profit............................................................ $ 27,981,000
General and administrative expenses (notes (2)-(7)) ............ (12,374,000)
Selling expenses (Note (8)) .......................................... (9,311,000)
Income from operations............................................... $ 6,296,000
Other income (Notes (9)-(10)) .............................................16,000
Net income before income taxes....................................... $ 6,312,000
Provision for income taxes............................................. (2,528,000)
Net income............................................................... $ 3,784,000
Notes:
Through various discussions with the accountant, you have been able to determine that the following information has been recorded in the financial statements:
(1) JAMS had a number of items of inventory that did not sell well in the current year. For accounting purposes, the accountant has recorded a reserve for inventory obsolescence. The reserve was calculated based on the carrying value of any inventory item that had not had a sale in the last 180 days. The reserve at year-end was $1,285,000.
(2) JAMS provides insurance for employees and paid the following amounts to Nat Insurance Company during the year:
$2,000,000 insurance policy on the life of the president included in insurance
expense ($300 per month)....................................................$ 3,600
$1,000,000 insurance policy on the life of the vice-president - marketing
included in insurance expense..................................................2,000
Group term life insurance for employees included in salaries and benefits
($37,000 X 12 months)................................................... 444,000
Total........................................................................ $449,600
JAMS is the beneficiary of the policies on the president and vice-president. On June 1, 2012, JAMS renegotiated its bank debt, and due to the ever increasing responsibilities of the president, the bank required the insurance policy on the life of the president as part of the collateral for the loan. The premiums on the policy are equal to the net cost of pure insurance for the policy.
(3) An analysis of the professional fees for 2012 revealed the following expenses:
Legal and accounting fees related to the issuance of shares..................$29,300
Legal fees related to amending the articles of incorporation.....................2,300
Costs incurred regarding the renegotiating of the bank loans....................46,100
Costs incurred to defend the company against a wrongful dismissal charge...59,600
Costs related to the structuring of an agreement for the purchase of equipment from
a foreign company.......................................................................38,700
Appraisal costs to determine value of the equipment for the bank.................5,100
(4) During the year, there were substantial repairs completed to the outside of the building. After the repairs some of the landscaping had to be redone. The total costs were $139,000. Of this, $23,500 relates to the landscaping costs. The entire $139,000 was included in general and administrative expenses.
(5) A review of the other expense accounts included in general and administrative expenses showed the following:
Amortization............................................................. $4,560,000
Interest on late payment of municipal taxes ..................................900
Severance payments to four managers ...................................245,000
Loss from theft by accounting clerk ........................................ 4,500
Donations to various registered charities...................................57,000
All of the amounts were paid in the year.
(6) The salaries and benefits account shows contributions for certain employees to the company's registered pension plan. The contributions were not actually made until March 31, 2013. The pension plan is a defined contribution (money purchase) plan. The company matches the employees' contributions on a dollar for dollar basis.
You have been assigned to the audit team for B.B.

(7) In early November 2012, JAMS announced an early retirement package that was made available to employees over the age of 60. In order to provide employees with the time required to assess the offer, the deadline for accepting the package has been set at February 15, 2013. While no formal replies were received as of December 31, 2012, the personnel manager anticipates a high acceptance rate. She expects that the costs associated with the packages will be $672,000. This cost has been accrued in the 2012 financial statements.
(8) The following information was taken from the various selling expense accounts:
Cost of sponsoring presentations at a local theatre company..............$15,000
Hockey game tickets given to customers.......................................8,000
Meals and entertainment costs of salespeople..............................109,500
Staff Christmas party and summer barbecue.................................43,800
Cost of sponsoring local little league teams....................................5,000
Memberships for salespeople at local golf courses ......................... 12,700
(9) The other income includes a loss on the sale of various fixed assets of $35,900.
(10) During the year, the company had cash on hand for a short period of time due to the timing of certain contract payments. The funds earned interest income of $10,400 while they were held.
Other Information:
(11) The accountant has calculated that JAMS is entitled to claim capital cost allowance and CECA of $5,835,000 in 2012. You have confirmed that this calculation is correct.
(12) In reviewing the income tax assessments, you noted that JAMS had been charged interest of $4,900 on the late payment of instalments. You discussed this with the accountant and determined that the interest was recorded in the income tax expense account.
REQUIRED
Based on the information that you have obtained, calculate the income from business for tax purposes for JAMS for December 31, 2012. Show all calculations whether or not they seem relevant to the final answer. Comment on all items omitted from the calculation.

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Related Book For  answer-question

Introduction To Federal Income Taxation In Canada

ISBN: 9781554965021

33rd Edition

Authors: Robert E. Beam, Stanley N. Laiken, James J. Barnett

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