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Corporate Tax Payable While for many years, Sweat Ltd. used a December 31 year end, a 2017...

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Accounting

Corporate Tax Payable

While for many years, Sweat Ltd. used a December 31 year end, a2017 change in the nature of its business resulted in the Companyrequesting a change in their taxation year end to August 31. Basedon the information provided, the CRA accepted this change.

The change will be implemented during 2017. Its Income Statementfor the period January 1, 2017 through August 31, 2017, prepared inaccordance with GAAP, is as follows:

Sweat Ltd.

Income Statement

8 Month Period Ending August 31, 2017

Sales (All WithinCanada)                                                                           $916,000

Cost OfSales                                                                                                   ( 485,000)

GrossMargin                                                                                                  $431,000

Other Expenses (Excluding Taxes):

        Wages AndSalaries                                    ($153,400)

       Amortization                                                    ( 49,300)

       Rent                                                                     ( 56,700)

        InterestExpense                                             (   5,500)

        Foreign ExchangeLoss                                  (   4,200)

        Travel AndPromotion                                  ( 44,300)

        Bad DebtExpense                                           (   5,400)

        WarrantyExpense                                          (   5,800)

        CharitableDonations                                     (   3,100)

        Other OperatingExpenses                         (19,800)                   ( 347,500)

OperatingIncome                                                                                          $ 83,500

Gain On Sale OfInvestments                                                                        3,900

Income BeforeTaxes                                                                                    $ 87,400

Other Information:

1.    In determining the Cost Of Sales, theCompany deducted a $17,800 reserve for inventory obsolescence.

2.    Wages and salaries includes a $35,000 bonusto Sweat Ltd.’s CEO. Because she anticipates retiring at the end of2018, this bonus will not be paid until January, 2019.

3.    Amortization is on the furniture andfixtures and delivery vehicles. The capital cost of the furnitureand fixtures is $147,000 and, at January 1, 2017, the Class 8 UCCbalance is $79,800. During 2017, new furniture was acquired at acost of $20,500. Old furniture with a capital cost of $14,200 wassold for $9,500.

On January 1, 2017, the Class 10 UCC balance was $103,400. Therewere no additions or disposals in this Class during the 8 monthperiod ending August 31, 2017.

4.    The interest expense relates to a line ofcredit that was used to finance seasonal fluctuations ininventory.

5.    The foreign exchange loss resulted fromfinancing costs related to the purchase of merchandise in theUnited Kingdom.

6.    The travel and promotion expense consistedof the following items:

Business Meals AndEntertainment                                          $15,200

Hotels AndAirfare                                                                              21,400

Golf ClubMemberships                                                                      7,700

Total Travel And PromotionExpense                                              $44,300

7.    For accounting purposes, the Companyestablishes a warranty reserve based on estimated costs. On January1, 2017, the reserve balance was $5,400. On August 31, 2017, a newreserve was established at $6,200.

8.    The accounting gain on the sale ofinvestments is equal to the capital gain for tax purposes.

9.    During the period January 1, 2017 throughAugust 31, 2017, the Company declared and paid dividends of$27,600.

10. On January 1, 2017, the Company has available an $18,700non-capital loss carry forward and a $6,250 [(1/2)($12,500)] netcapital loss carry forward.

Required:  Calculate the minimum NetIncome For Tax Purposes and Taxable Income for Sweat Ltd. for the 8month period ending August 31, 2017. Indicate the amount and typeof any carry forwards that will be available for use in futureyears.  

Answer & Explanation Solved by verified expert
3.8 Ratings (507 Votes)
Computation of Minimum NetIncome for Tax Purposes1 Reserves for inventory obsolescence is to be provided bypassing following entry Cost of Goods Sold Account DrTo Inventory AccountSo The Amount deducted shall be added back to Cost of Salesamount and it is to be accounted for Cost of Goods Sold accountingThis expense is not allowed for computation of taxable income2 Unpaid Bonus shall be added back    See Answer
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Transcribed Image Text

Corporate Tax PayableWhile for many years, Sweat Ltd. used a December 31 year end, a2017 change in the nature of its business resulted in the Companyrequesting a change in their taxation year end to August 31. Basedon the information provided, the CRA accepted this change.The change will be implemented during 2017. Its Income Statementfor the period January 1, 2017 through August 31, 2017, prepared inaccordance with GAAP, is as follows:Sweat Ltd.Income Statement8 Month Period Ending August 31, 2017Sales (All WithinCanada)                                                                           $916,000Cost OfSales                                                                                                   ( 485,000)GrossMargin                                                                                                  $431,000Other Expenses (Excluding Taxes):        Wages AndSalaries                                    ($153,400)       Amortization                                                    ( 49,300)       Rent                                                                     ( 56,700)        InterestExpense                                             (   5,500)        Foreign ExchangeLoss                                  (   4,200)        Travel AndPromotion                                  ( 44,300)        Bad DebtExpense                                           (   5,400)        WarrantyExpense                                          (   5,800)        CharitableDonations                                     (   3,100)        Other OperatingExpenses                         (19,800)                   ( 347,500)OperatingIncome                                                                                          $ 83,500Gain On Sale OfInvestments                                                                        3,900Income BeforeTaxes                                                                                    $ 87,400Other Information:1.    In determining the Cost Of Sales, theCompany deducted a $17,800 reserve for inventory obsolescence.2.    Wages and salaries includes a $35,000 bonusto Sweat Ltd.’s CEO. Because she anticipates retiring at the end of2018, this bonus will not be paid until January, 2019.3.    Amortization is on the furniture andfixtures and delivery vehicles. The capital cost of the furnitureand fixtures is $147,000 and, at January 1, 2017, the Class 8 UCCbalance is $79,800. During 2017, new furniture was acquired at acost of $20,500. Old furniture with a capital cost of $14,200 wassold for $9,500.On January 1, 2017, the Class 10 UCC balance was $103,400. Therewere no additions or disposals in this Class during the 8 monthperiod ending August 31, 2017.4.    The interest expense relates to a line ofcredit that was used to finance seasonal fluctuations ininventory.5.    The foreign exchange loss resulted fromfinancing costs related to the purchase of merchandise in theUnited Kingdom.6.    The travel and promotion expense consistedof the following items:Business Meals AndEntertainment                                          $15,200Hotels AndAirfare                                                                              21,400Golf ClubMemberships                                                                      7,700Total Travel And PromotionExpense                                              $44,3007.    For accounting purposes, the Companyestablishes a warranty reserve based on estimated costs. On January1, 2017, the reserve balance was $5,400. On August 31, 2017, a newreserve was established at $6,200.8.    The accounting gain on the sale ofinvestments is equal to the capital gain for tax purposes.9.    During the period January 1, 2017 throughAugust 31, 2017, the Company declared and paid dividends of$27,600.10. On January 1, 2017, the Company has available an $18,700non-capital loss carry forward and a $6,250 [(1/2)($12,500)] netcapital loss carry forward.Required:  Calculate the minimum NetIncome For Tax Purposes and Taxable Income for Sweat Ltd. for the 8month period ending August 31, 2017. Indicate the amount and typeof any carry forwards that will be available for use in futureyears.  

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