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TR Ltd. is a Canadian-controlled private corporation operating a franchised retail and mail-order
business in Toronto, Ontario. You may use whatever address and postal code you wish. The
business number for TR is 11111-1118 RC0001. Denver Chan, the company’s president, owns
100% of the corporation’s share capital. For the year ended November 30, 2020 (first full year of
operation), TR Ltd.’s financial statement reported income of $157,090 (see exhibit I for detailed
financial statements).
You have been retained to help prepare the company’s first tax return and to advise on other taxrelated matters. Financial information relating to the 2020 taxation year and to the corporation’s
financial statement is summarized below.
TR Ltd. – Selected Financial Information

  1. The following properties were purchased for the new business:
    Franchise $ 40,000
    Land 30,000
    Building 270,000
    Delivery truck 40,000
    The franchise, purchased on December 1, 2019, permits the corporation to operate under
    the TR name for a period of 15 years. A renewable period of another 15 years is available,
    subject to satisfactory performance. The land cost of $30,000 consists of the purchase price
    of $20,000, $7,000 for permanent landscaping, and $3,000 for water and sewer
    connections. The building was constructed after March 18, 2007. On October, 15, 2020, the
    truck was involved in an accident. The damage was not repairable, and TR immediately
    signed an agreement with the insurance company to settle the claim for $31,000. The cash
    was received on December 10, 2020. Another truck was obtained under a lease
    arrangement. Amortization expense of $28,000 has been deducted from income.
  2. Legal expense includes the following costs:
    Preparing annual corporate minutes $ 300
    Incorporation costs for TR Ltd. 1,500
    Negotiation of franchise agreement 2,000
  3. Repairs and maintenance expense includes the following items:
    Paving the parking lot $8,000
    Cleaning and supplies 1,400
    Replacing a broken window 1,000
    Small tools costing less than $500 1,200
  4. Advertising expense includes a cost of $7,000 to acquire a permanent mailing list for the
    mail-order business. The list has an expected life of six years. Other advertising items are
    listed below:
    Cost of making a television commercial $25,000
    Travel costs for Denver to attend a franchiser convention. Denver’s
    spouse travelled with him and attended a social function
    (souse’s expenses were $1,500) 3,000
    Charitable donations 2,000
    Meals and beverage costs for entertaining suppliers 1,800
    Costs of leasing and maintaining a pleasure boat to entertain
    suppliers and employees 2,600
    Television advertising
    Toronto station 11,000
    Buffalo USA station directed at the Toronto Canada market 6,000
  5. A contingent reserve for possible defective products of $5,000 was recorded as a charge
    against cost of sales. During the year, $3,000 of products were returned.
  6. On May 31, 2020, TR invested $40,000 in a one-year bank certificate earning annual
    interest of 7%. TR intends to recognize the interest revenue upon receipt at its one-year
    anniversary date.
  7. Interest expense includes $14,000 on the building mortgage and $700 from a temporary
    bank loan of $12,000. The bank loan funds were, in turn, loaned, without interest, to Y
    Ltd., a corporation owned by Denver’s brother. Y Ltd. used all of its assets to operate an
    active business but declared bankruptcy in November 2020.
  8. TR is planning to sell a new product in 2021—a bracelet with a charm depicting a popular
    cartoon character. The bracelet and charm will be ordered from separate suppliers, and
    TR’s staff will assemble the two pieces and package them in a specially designed box.
  9. Shortly after incorporation, TR acquired 46% of the voting common shares of Q Ltd., a
    Canadian-controlled private corporation that supplies certain products to TR and other
    retailers. On October 31, 2020, TR received a non-eligible dividend of $15,000 from Q Ltd.
    At the time, Q Ltd. had non-eligible RDTOH of $2,000. An opportunity exists for TR to
    purchase an additional 5% of the voting common shares of Q Ltd. early in 2021. A
    decision will be made in January 2021.
  10. On November 30, 2020, TR declared and paid a non-eligible dividend of $40,000.
    EXHIBIT 1:
    Statement of Income
    Sales $1,474,590
    Cost of sales 810,000
    Gross profits 664,590
    Expenses:
    Salaries and wages $232,000
    Management bonuses 50,000
    Employee benefits 33,000
    Interest expenses 14,700
    Insurance 7,000
    Defective Products reserve 5,000
    Legal and accounting 3,800
    Repairs and maintenance 11,600
    Travel 8,000
    Advertising and promotion 58,400
    Bad debts 36,000
    Provision for sales returns 5,000
    Depreciation/amortization 28,000
    Donations 4,000
    Loss on sale of marketable securities 6,000 502,500
    162,090
    Other:
    Dividends received 15,000 15,000
    Net income before Income Taxes
    Income tax provision
    Net Income after Income taxes
    $ 177,090
    20,000
    157,090
    Opening Retained Earnings
    Less: Dividends Declared and Paid
    Ending Retained Earnings
    0
    40,000
    $117,090
    Balance Sheet
    ASSETS:
    Current Assets:
    Cash $2,000
    Accounts Receivable
    Loan Receivable
    Bank Certificate
    Inventory
    130,000
    12,000
    40,000
    80,000
    Prepaid Expenses 4,590
    Total Current Assets 268,590
    Property, Plant and Equipment
    Delivery Truck
    Franchise
    $0
    40,000
    Land 30,000
    Building 270,000
    340,000
    Less Accumulated Amortization 28,000
    Total Property, Plant and Equipment
    Investment in Q Ltd.
    312,000 312,000
    58,000
    Total Assets $638,590
    LIABILITIES:
    Accounts Payable and accrued liabilities
    Loan Payable
    $214,500
    12,000
    Taxes Payable 20,000
    Due to shareholders 136,000
    Total Liabilities 382,500
    SHAREHOLDERS’ EQUITY
    Share Capital 139,000
    Retained Earnings 117,090
    Total Shareholders’ Equity $ 256,090
    Total Liabilities and Shareholders’ Equity $638,590

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