# Financial Accounting Solved Homework Solution Sample

QUESTION

Answer the problems using the instructions for each question. Address all the issues required. Each question is worth the stated value. Cover all of the key points and ensure that all calculations are clearly shown, or marks will not be awarded.

Problem 1

Division B Income

Iona has come to you to help her compute her employment income for the year. Her details are as follows.

Iona’s income for the year is as follows:

 Salary — gross \$99,000 Less: CPP and EI contributions (3,452) Less: RPP Contributions (matched by employer) (contributions are to a defined benefit pension plan) (4,100) Allowance for travel costs 5,000 Allowance for gas (\$300 per month) 3,600 Bonus based on her sales volume 18,000 \$118,048

The total costs of travel, partially for work, are as follows:

 Gas, oil, and maintenance \$8,000 License and insurance 3,000 \$11,000

Iona discovered that she needed a car for work. She purchased a Volkswagen Passat on January 10, 2018 for \$55,000, plus HST of 13% for a total of \$62,150. She received the money to buy the car from her dad. During the year, she has driven 34,000 km for work and only 6,000 km for personal use. You know that the CCA rate for cars is half of 30% in the first year. Additional costs of travel while away from the area of where she lives are airfare (\$3,500), accommodation (\$4,000), and meals (\$2,500).

The company does not give her an office, as she is out selling every day. She has partitioned a workspace in her home that she uses for her office. The office space takes up about 20% of the home and is used for no other purpose. The company provided all employees with a turkey at Christmas and Thanksgiving (value of \$80 in total for the year). The company has deducted this expense for tax purposes.

The costs associated with Iona’s home are as follows:

 Oil for furnace \$ 3,000 Telephone service (basic monthly charge for home phone) 800 Mortgage interest 6,000 Long-distance calls for work 1,000 Property taxes 5,000 Computer equipment needed for work (CCA would be \$375) 2,500 General upkeep and maintenance 2,000 Contents and property insurance 900 Supplies for the office 400 \$21,600

Under Iona’s contract of employment, she is required to pay all of her own employment-related expenses as well as the costs to maintain her own office. She regularly travels out of the municipality on employment-related matters.

Required:

Compute Iona’s income from employment. Show/support any computations whether or not relevant to your final answer. Cite in detail the relevant provisions in the Income Tax Act, and provide explanations to support all inclusions, deductions, and exclusions.

Problem 2

Corporation’s Minimum Income from Business or Property

The following information is taken from the financial statements and audit working papers of Eldridge Asset Sales Inc. (“EASI”) for its fiscal year ended December 31, 2018.

Eldridge Asset Sales Inc.

Condensed Unaudited Income Statement

For the Year Ended December 31, 2018

 Sales \$16,650,000 Cost of goods sold (14,050,000) Gross profit \$ 2,600,000 Selling expenses \$975,000 General and administrative expenses 195,000 (1,170,000) Net income before provision for income taxes \$ 1,430,000 Provision for income taxes — current \$220,000 — future 310,000 (530,000) Net income after tax \$ 900,000

Included in sales for the year is a deposit of \$8,200 received from a customer for goods that will be delivered next year.

The following items were deducted in arriving at the above net income:

1. During the year, a warehouse worker managed to remove valuable inventory worth \$8,000 during the night shift by taking it out in his lunch box.

2. Late in the year, it became apparent that during the next year new competitive products would come on the market which would drive the price of EASI’s products down. They expect this decline to take place in about six months. As a result, they decided to set up a reserve for a decline in the inventory value in the amount of \$17,000. They have never set up this kind of reserve before.

3. Because EASI’s products come back for repair under their warranty program, they set up a reserve for this expense on their financial statements. Last year the reserve was \$76,000. This year they increased the reserve to \$97,000.

4. Charitable donations were made in the amount of \$9,000.

5. Golf club membership fees in the amount of \$2,600 were paid for the sales manager who used the club regularly to close sales.

6. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of \$2,300.

7. Management bonuses of \$96,000 were accrued at December 31, 2018 (\$35,000 was not paid until June 30, 2019 due to lack of sufficient funds).

8. The December holiday banquet for the employees cost \$15,000.

9. EASI had a dispute with one of its major suppliers over the use of the supplier’s product. As a result of a court decision, the supplier was awarded damages for breach of contract in the amount of \$38,000.

10. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of \$5,000 and appraisal fees of \$2,000 related to this financing. The mortgage has a 10-year term and a 30-year amortization period.

11. A number of years ago, the company issued a bond at a discount. They have been amortizing this discount at the rate of \$7,000 per year ever since, including this year.

12. During the year, the company bought the shares of another company. In completing this transaction, legal fees of \$8,500 were incurred.

13. During the year, they borrowed to buy new equipment. The interest expense related to this was \$23,000.

14. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of \$390.

15. A life insurance policy 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 amounted to \$4,600.

16. Business interruption insurance premiums of \$3,300 were paid to protect the company in the event a fire forced them to close for a period of time.

17. Computer software costing \$750 related to word processing was expensed because they always bought the upgrades each year.

18. Amortization expense on the fixed assets was \$86,000.

An examination of the capital cost allowance schedule for 2018 provided the following opening balances for the undepreciated capital cost for each class of EASI’s assets:

 Class 3 — building \$208,734 Class 8 — office furniture and equipment 60,000 Class 10 — trucks for transportation of goods 80,000 Class 12 — small tools 5,000 Class 13 — leasehold improvements 187,500 Class 44 — Patent and rights limited life 90,000

The following additional information was found in the 2018 fixed asset schedules working paper files.

1. The building which cost \$997,426 in 1987 was sold for \$150,000. It was the only building in Class 3 at the time of its sale. A new building was purchased (non used) in April 2018 for \$750,000. Also, in February 2018 a lot adjacent to the new building, was purchased for \$100,000 for use as a parking lot by employees and visitors. This lot was paved at a cost of \$25,000. A fence was erected around an outside storage area near the new building at a cost of \$40,000.

2. New office furniture was purchased for \$20,000. This purchase replaced old assets which were sold for \$5,000. None of the old assets was sold for more than capital cost.

3. Three small trucks purchased in 2013 for \$12,000 each were traded in for three new trucks. Each new truck was priced at \$15,000, but this was reduced by a trade-in credit of \$2,500 for each old truck.

4. Some small tools were sold for a total of \$7,000. All of these tools were sold at a price less than their capital cost.

1. Leasehold improvements had been made to a leased warehouse at a cost of \$225,000 in 2016. The remaining length of the lease in that year was six years with two successive renewal options of three years each. Further leasehold improvements were made to this warehouse in 2018 at a cost of \$21,000.

2. During 2018, an unlimited life franchise was purchased for \$48,000.

3. Accounting gains and losses on the above asset sales netted to nil.

Required:

Based on the foregoing information, compute the minimum income from business for tax purposes for Eldridge Asset Sales Inc. in respect of its 2018 fiscal year. In addition, comment on the items not included in your calculation of income from business.

Problem 1: Solution

 Assessee : Ms. Lona S/N Particulars Amount (\$) Amount (\$) 1 Income From Salaries Gross Salary 99,000.00 Add: CPP & EI Contributions (Exempted) 0 RPP Contributions (Exempted) 0 Travel Cost Allowances 5000 Bonus 18000 Gas Allowances 3600 26,600.00 Less: Airfare 3500 Accomodation 4000 Meals 2500 Tarvel costs 5500 Motor Vehicle Expenses 7924.125 -23,424.13 1,02,175.88

Note:

1. Gross salary is taxable.

2. CPP & EI contributions are fully exempted from tax.

3. RPP contributions are also fully exempted from tax.

4. Travel allowances provided by the employer are taxable.

5. Bonus given by the employer is liable to tax.

6. Gas allowances given to employees is fully taxable.

7. Airfare,Accomodation,meals Tarvel costs expenses with respect to travel for employers work are fully deductible.

8. Motor vehicle used for work purposes exclusively will be allowed as dedcution.

9. work space in home is not liable for deduction as she ois using only 20% of the space for office work .

Problem 2 Solution

 Assessee: Elridge Asset Sales Inc. Business Income: Particulars Note No. Amount (\$) A. Receipts i Gross Sales 1 1,66,50,000.00 ii Reserves Deducted last year 2 76,000.00 iii Reserves Created Current Year 2 -97,000.00 iv Other Incomes 0 – v Gross Business Income: 0 1,66,29,000.00 vi Cost Of Goods sold 3 1,40,50,000.00 vii Gross Profit (A) 25,79,000.00 B Expenses i Meals & Entertainment 4 2,300.00 ii Insurance 5 7,900.00 iii Interest & Bank Charges 6 23,000.00 iv Legal Fees 7 8,500.00 v Accounting & Appraisal Fees 8 7,000.00 vi Employee Cost 9 76,000.00 vii Other Expenses 10 49,350.00 viii Charitable Donations 11 9,000.00 ix Amortisation expenses 12 7,000.00 x Depreciation Expenses 13 86,000.00 Total Expenses (B) 2,76,050.00 C. Net Taxable Profit (A-B) 23,02,950.00

Notes:

1. Gross sales as provided in the question is considered . Deposit received from the customer for the item delivered in next year is not liable to deduct from the gross sales figure in the current year and will be taxed .

2. Reserves created in last year for warranty progeramme is liable to be added to the current year sales figure while the reserves created for the current year is deducted from the sales figure.

3. Cost of good sold as provided in the question is considered.

4. Meals and entertainment fees incurred by the sales manager at the golf club is allowed as per income tax rules.

5. Insurance premium shall be allowed for deduction as follows:

 Insurance Premium: Premium paid to insure President’s life \$4,600.00 Premium Paid for fire insurance \$3,300.00 Total \$7,900.00

1. The interest expense on borrowing for buying new equipment is allowed as business expenditure.

2. legal fees incurred for buying other company’s share will be allowed as business expenditure.

3. Accounting fees and appraisal fees incurred for raising money for expansion is allowed as business expenditure.

4. Employee cost shall be allowed for deduction as follows:

 Employee cost: Bonus announced to employees \$96,000.00 Bonus not paid to employees till the date of return filing \$35,000.00 Bonus Allowed for deduction \$61,000.00 Holiday Banquet for employees \$15,000.00 Total Employee cost \$76,000.00

10.

 Other expenses Golf club memebership expenses \$2,600.00 Theft By employee \$8,000.00 Penalty for breach of contract \$38,000.00 Computer software purchased \$750.00 \$49,350.00

11. Charitable donations given shall be allowed as business expenditure.

12. Discount on bond is liable to be amortised every year.

13. Depreciation shall be provided as per rules.

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