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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
- 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. - Legal expense includes the following costs:
Preparing annual corporate minutes $ 300
Incorporation costs for TR Ltd. 1,500
Negotiation of franchise agreement 2,000 - 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 - 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 - 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. - 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. - 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. - 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. - 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. - 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
Sample Solution
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