Taxation Flashcards
10-20%
Jennifer Jones is a self-employed building inspector. Jennifer maintains a home office that occupies 10% of the square footage of her home. The following costs were incurred by Jennifer to maintain her home in the current year:
Telephone (general line) $600 House insurance $2,000 Property taxes $4,000 Heat, hydro, and maintenance $5,000 Mortgage interest $24,000
Jennifer estimates that she uses her telephone 50% for business purposes during the year.
What is the maximum amount that Jennifer can claim for the costs incurred with respect to her home office?
a) $500
b) $1,100
c) $3,500
d) $3,800
C - telephone not included
Accounting net income (determined in accordance with generally accepted accounting principles) of Extec Inc. (Extec) is $456,000. Additional information is as follows:
· Extec’s amortization expense for the year was $30,000. Maximum capital cost allowance (CCA) for the year was $25,400.
· Extec estimated and deducted $7,500 in warranty costs during the year. Actual warranty costs paid for providing warranties during the year were $4,600.
· Extec expensed $3,800 in charitable donations during the year.
Based on the information above, determine Extec’s net income for tax purposes for the year.
a) $458,100
b) $461,500
c) $463,500
d) $467,300
D - $456,000 accounting income + $30,000 amortization expense – $25,400 CCA + $7,500 warranty expense – $4,600 warranties paid + $3,800 charitable donations = $467,300.
You, CPA, are a senior manager at Lloyd and Lloyd LLP. One of your junior accountants has calculated net income for tax purposes for Yolanda Inc. for the year ending December 31. You are reviewing the junior’s work on the Schedule 1 reconciliation of net income for accounting purposes to net income for tax purposes. Which of the following is an error in the junior’s work?
a) During the year, Yolanda acquired a business and paid $105,000 for the goodwill of the business. For accounting purposes, a $45,000 goodwill impairment loss was recorded in the current year. The goodwill impairment loss was added back on the Schedule 1 reconciliation.
b) During the year, Yolanda recorded $115,000 in amortization expense. The amortization expense was added back on the Schedule 1 reconciliation. The maximum capital cost allowance (CCA) that Yolanda can claim is $107,000. Per Yolanda’s direction, $107,000 in CCA was deducted on the Schedule 1 reconciliation.
c) During the year, Yolanda made charitable donations of $40,000 and deducted this cost in the accounting records. This amount was added back on the Schedule 1 reconciliation.
d) The company paid $15,000 in membership fees at a local golf club for four of its employees and deducted this cost in the accounting records. The club is used 80% of the time for entertaining clients of Yolanda. $3,000 ($15,000 × 20%) was added back for the membership fees on the Schedule 1 reconciliation.
D - The full amount of the membership fees at the local golf club are not deductible for tax purposes and should be added back on the Schedule 1 reconciliation. The percentage use for entertaining clients is not relevant.
Which of the following is not an adjustment on the Schedule 1 for corporate income taxes?
a) A taxable capital gain on the sale of a depreciable fixed asset
b) A capital loss on the sale of a depreciable fixed asset
c) An accounting gain on the sale of marketable securities
d) An accounting write-down on the decline in value of marketable securities
B - A capital loss on the sale of a depreciable fixed asset is not permitted for tax purposes
You are preparing a corporate tax return for a client, Vista Ltd. Net income before tax per the reviewed financial statements is $42,500. During the course of your review, you note a number of items that you think might be tax related:
Interest on late payroll remittances $120
Golf club membership for the president $1,400
Reimbursement to sales staff for cost of client lunches $4,500
Company Christmas party $1,700
Also, the company sold all the shares it held in Telus for $9,000. The shares had an accounting base and an adjusted cost base of $10,000. A loss on sale of shares was included on the income statement.
Capital cost allowance equals amortization per the financial statements.
What amount should be reported for net income for tax purposes on the T2?
a) $46,270
b) $46,770
c) $47,270
d) $48,120
C - $42,500 + $120 + $1,400 + (0.5 × $4,500) + $1,000 = $47,270. Interest on late payroll remittances, golf membership fees, 50% of lunches, and the accounting loss on the sale of shares are added back to net income per the reviewed financial statements.
You are the assistant controller for Warren Enterprises Inc. (Warren) and you are calculating taxable income for the current year ended December 31. Net income before tax per the financial statements is $267,200.
Other information includes the following:
Amortization expense per the financial statements $301,400
Capital cost allowance for the year $386,000
Advertising and promotion includes the following:
Golf club dues $10,800
Green fees $3,750
Amounts spent on meals, entertaining clients at the golf club $7,200
During the year, the company sold all of its shares in Public Co. for proceeds of $16,000. The cost of the shares was $13,200.
Donations made to Canadian Cancer Society $700
The company has a capital loss carry-forward of $1,500 from the previous year when it sold shares in Shaw Inc. costing $11,500 for $10,000.
What amount should be reported for net income for tax purposes on the T2?
a) $198,175
b) $199,300
c) $199,350
d) $200,050
D - $267,200 + $301,400 + $10,800 + $3,750 + (0.5 × $7,200) + $700 + [($16,000 – $13,200) × 0.5] – $386,000 – ($16,000 – $13,200) = $200,050. Amortization expense, golf club dues, green fees, 50% of meals and entertainment, donations, and the taxable capital gain on the sale of the Public Co. shares are added back to net income (before tax) per the financial statements. Capital cost allowance and the accounting gain on the sale of the Public Co. shares are then subtracted.
M&N Co., a portable electronics manufacturer, had net income for accounting purposes before tax for the current year ending December 31 of $375,000. During the year, the company received eligible dividends from taxable Canadian corporations in the amount of $15,600 and spent $125,400 on the development of a new product. The total of the development costs have been included in a deferred development cost account in the balance sheet. M&N had a warranty accrual balance of $23,000 at the beginning of the year and a warranty accrual balance of $18,000 at the end of the year. On the income statement, M&N shows a warranty expense of $15,000. Determine the company’s net income for tax purposes for the current year.
a) $229,000
b) $244,600
c) $264,600
d) $370,000
B - $375,000 net income for accounting purposes before tax – $125,400 development costs – $23,000 opening warranty accrual + $18,000 closing warranty accrual = $244,600.
Which of the following is an adjustment on the Schedule 1 for corporate income taxes?
a) A general reserve for inventory obsolescence of $13,000.
b) $1,100 for the cost of uniforms with the company logo provided to the local peewee soccer team.
c) An accounts receivable allowance of $4,600 for three accounts determined by specifically identifying accounts that may not be collectable.
d) A $50,000 contribution to the company-sponsored defined contribution pension plan (equal to the pension expense reported for the year).
A - General reserves (estimated reserves) are not deductible for tax purposes and must be added back on the Schedule 1.
Melanie Jones is the proprietor of MJ Enterprises, an unincorporated business. Financial statements for her business have been prepared in accordance with GAAP/ASPE. Which of the following items is adjusted for in the reconciliation of financial statement income to self-employment income for tax purposes?
a) Accounting gains on the sale of business assets
b) Allowable capital losses on disposal of depreciable capital assets
c) An amount Melanie withdrew from the business bank account for personal purposes
d) Child-care expenses
A - Accounting gains on the sale of business assets are deducted, and taxable capital gains and recapture, if applicable on such sales, are added for tax purposes.
CBV Ltd. had net income for accounting purposes before taxes of $200,000 for the current year ended December 31. The following amounts were deducted in determining this amount:
· $25,000 for an estimated contingent liability related to a lawsuit
· $21,500 in allowances paid to commissioned salespersons for entertaining clients
· $980 for late payment of property taxes
The capital cost allowance claim is equal to depreciation deducted in the income statement. Determine the company’s net income for tax purposes for the current year.
a) $235,750
b) $225,000
c) $211,730
d) $225,980
B - $200,000 accounting income + $25,000 contingent liability = $225,000. The contingent liability for the lawsuit is not deductible because it is a reserve that is not allowed for tax purposes. Interest on late payment of property taxes is deductible because nothing in the ITA indicates it is not (it is not an amount payable under the ITA). The allowance for entertaining clients is fully deductible, as it would be a taxable benefit to the commissioned salespersons.
You, CPA, are the controller for an electronics retailer, Future Now Ltd. (Future). You have been asked to prepare a Schedule 1 reconciliation of accounting net income to net income for tax purposes for the current year ended December 31. Which one of the following items will be deducted on the Schedule 1 reconciliation?
a) During the year, Future expensed estimated warranty costs of $39,000.
b) Future deducted $3,800 in interest on its operating line of credit.
c) Future recorded $2,500 of interest charged on late income tax instalments.
d) Future recorded $8,900 of premium amortization on the company’s bonds payable.
D - The premium amortization of $8,900 will be deducted on the Schedule 1 reconciliation.
Your client, Janice, has an unincorporated home-based business. Janice sells baby blankets around town at various flea markets and craft fairs that are held throughout the year. Her information is as follows:
Sales less cost of sales $5,000 Office supplies and marketing materials $4,500 Craft fair registration fees $275 Telephone (this is the cost of her home phone line) $240 Internet $175 Mortgage interest $7,000 Property taxes and insurance $2,700 Heat, utilities and maintenance $4,300
Janice uses the internet to sign up for craft fairs and look for patterns, and hosts her own web page.
Janice’s house is 2,500 square feet, and she uses 750 square feet for her sewing room and office.
Information for Janice’s vehicle is as follows:
Total kilometres driven in year 16,500
Total kilometres driven to craft fairs and flea markets 4,125
Total fuel cost $2,350
Total maintenance $1,500
Insurance and registration $1,400
Capital cost allowance: $20,500 × 30% $6,150
What amount of business income will she report on her personal tax return this year?
a) $50 profit
b) $2,625 loss
c) $2,900 loss
d) $7,000 loss
C - $5,000 sales less cost of sales – $4,500 office supplies and marketing materials – $275 craft fair registration fees – $175 Internet fees – $2,850 automobile expenses = –$2,900. Automobile expenses: ($2,350 + $1,500 + $1,400 + $6,150) × 4,125 / 16,500.
Which of the following statements is false when determining if shares are considered to be qualified small business corporation shares?
a)
The corporation is a Canadian-controlled private corporation (CCPC).
b)
Shares were owned by the taxpayer for 24 months before being sold.
c)
Over the 24 months preceding the sale, more than 50% of the fair value of the assets of the corporation must be used in an active business.
d)
At the time the shares are sold, 90% of the book value of the assets must be used in an active business carried on primarily in Canada.
D - This would not be considered. The criteria require that 90% of the fair value, not the book value, of assets be used in an active business carried on primarily in Canada.
During the current year, Jim Reynolds sold qualified small business corporation shares for $500,000. The adjusted cost base for the shares was $4,000. During the year, Jim also realized a business investment loss of $10,000. He has never used any of his $835,716 lifetime capital gains exemption, and the balance in his cumulative net investment loss account is nil.
What is the maximum capital gains deduction that Jim may claim in the current year?
a)
$238,000
b)
$243,000
c)
$248,000
d)
$417,858
B - $243,000 was determined as follows: ($500,000 – $4,000) × ½ = $248,000 (taxable capital gain on qualified small business corporation shares) less ½ × $10,000 = $5,000 (allowable business investment loss). This is less than Jim’s lifetime capital gains deduction available of $835,716 × ½ = $417,858.
