Chapter 6 Homework Solution

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Okanagan College *

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Feb 20, 2024

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BUAD 208 Chapter 6 Homework Name: ______________________________________ Rebecca’s Delicious Delights (RDD) is a Canadian Controlled Private Corporation. It operates a store front bakery and also does some catering in Penticton, BC. Rebecca Chow, the manager and majority shareholder of RDD, has asked you to take a look at her current year financial information to help her determine how much money she will need to set aside for taxes. The financial statements, and other information, for the year ended December 31, 2023 are as follows: Rebecca's Delicious Delights Income Statement For the Year Ended December 31, 2023 Sales 1,326,512 Cost of goods sold (415,623) Gross profit 910,889 Operating expenses Depreciation 104,500 General and administrative 475,000 Interest 60,000 (639,500) Operating income 271,389 Other income Gain on sale of equipment 2,400 Income before taxes 273,789 Income taxes (41,068) Net income 232,721 Additional Information: 1. Rebecca doesn’t believe in recording an allowance for bad debt in her financial statements and as such the $12,000 in bad debt expense included in the general and admin expense is for a specific account owed by a customer who went bankrupt. In 2022 RDD claimed a reserve for doubtful accounts of $9,000 for tax purposes. After a review of outstanding accounts, Rebecca believes that the corresponding amount for the current year would be $11,000 2. The following amounts were included in the General and Admin Expense:  $4,200 donated to Canadian Cancer Society, a registered Canadian charity  Because of a rat infestation, Rebecca was forced to throw out baked goods that had a cost of $1,200 and a retail value of $6,500. She expensed the retail amount.  As her shop is close to the border, Rebecca advertises on an Oroville, Washington State radio station. The station can be clearly received in Penticton and the ads are targeted at Penticton residents. The cost of these ads in 2023 was $800.

 When making deliveries out of town, Rebecca pays one of her employees 80 cents per kilometre to use their personal vehicle. In 2023 she paid this employee $3,440 for 4,300 km driven.  During the year Rebecca spent $5,300 on lunch and dinner meetings with customers.  Rebecca pays her 12 year old daughter $2,000 per month to clean up the bakery for four hours every Sunday. Because of other obligations her daughter only worked 42 Sundays throughout 2023, although she still received the full $2,000 every month. On the other 10 Sundays, Rebecca paid one of the other staff members $12 per hour to do the same job.  During the year RDD spent $10,000 on legal fees to reorganize the share structure of the company. The full amount was expensed on the income statement.  On July 1 st RDD purchased the exclusive franchise right to produce “Little Sally’s Snack Cakes” in Canada, a sugar cake that has sold very well in Australia, for the next 10 years. The agreement cost RDD $70,000, which was expensed on the current year financial statements. 3. During the year Rebecca was considering opening a second location in Kelowna. Upon hearing this, some of the other local bakeries paid RDD $50,000 to stay out of the central Okanagan. Not knowing the proper treatment for this payment, Rebecca recorded it as a deferred revenue liability. 4. Undepreciated capital cost balances on January 1, 2023 were as follows:  Class 8 (20%) $147,000  Class 10 (30%) 42,000 5. During the year RDD sold some kitchen equipment (Class 8) for $3,000. It had an original cost of $6,500 and a Net Book Value of $600. 6. Interest expense on the income statement includes $2,300 for late payment of income tax installments and $3,400 in interest on the business line of credit used to fund day to day operations. Please advise Rebecca as to the company’s Net Income for Tax Purposes for the year ended December 31, 2023. You must use the reconciliation method.

Net income per F/S 232,721

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Income taxes 41,068 Amortization 104,500 Gain on sale of equipment (2,400) Prior year reserve 9,000 Current year reserve (11,000) Charitable donation 4,200 Adjust w/o amount to cost (6,500 - 1,200) 5,300 Foreign advertising 800 Reasonable auto allowance is $0.68 (3,440 - (4,300 X .68)) 516 Meals with clients (1/2) 2,650 Adjust daughters wage to reasonable (24,000 - (42 X 4 X 12)) 21,984 Share reorganization (should be class 14.1) 10,000 License (should be class 14) 70,000 Non compete agreement 50,000 CRA interest 2,300 CCA (47,443) Net business income 494,196 Class 8 ((147,000 - 3,000) X .2) 28,800 Class 10 (42,000 X .3) 12,600 Class 14 ((70,000/10) X 184/365)X1.5 5,293 Class 14.1 ((10,000 X 1.5) X .05) 750 Total CCA 47,443

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