Reference no: EM132898418
Question - Gordon Appliances Reg. is a sole proprietorship owned by Jack Gordon. Jack owns four appliance stores located in the southern interior of British Columbia. For the year just ended, December 31st, 2020, the business has reported a net income for accounting purposes of $214,000.
The financial statements presented to you included the following information:
1. The profit of $214,000 consists of the following items:
Income from retail operations $192,000
Net accounting gain on sale of land, building, equipment and goodwill 22,000
$214,000
2. The previous year's tax return showed the following closing UCC balances:
Class 1 (4%) $420,000
Class 8 (20%) 70,000
Class 10 (30%) 40,000
Class 12 (100%) 4,200
Class14.1 (5%) 28,000
3. On January 1, 2020, one of the stores was sold. A new store, in leased premises, was opened on the same date. Information on the sale of the store is given below:
Selling price Original Cost
Asset sold:
Land $28,000 $4,000
Building (class 1) 170,000 162,000
Equipment (class 8) 18,000 28,000
Goodwill (class 14.1) 40,000 32,000
4. In opening the new store located on leased premises, the following assets were purchased:
Unlimited life franchise (class 14.1) $20,000
Equipment and furniture (class 8) 22,000
Leasehold improvements (class 13, SL) 36,000
The acquired lease had three years remaining in its term at the date it was signed. The lease contract provides for two renewable option periods of one year each.
5. On December 31, 2020, Gordon Appliances sold its delivery truck (class 10) for $43,000 and leased a new vehicle. The original cost of the truck was $49,000.
6. Jack runs the administrative aspects of his business from his office located in the basement of his home. The office has a separate entrance and occupies 20% of the home's entire square footage. His total home cost for 2020 consists of property taxes - $4,000, mortgage interest - $10,000, insurance - $1,000, utilities - $5,000 and minor repairs - $2,000. These expenses have not been deducted in calculating the operating income of the business.
7. Jack uses his own vehicle for business purposes. For the first three months of the year, he used a leased vehicle and paid $2,600 in total for the three months. On April 1, 2020, he purchased a new BMW (class 10.1, 30%) costing $60,000. For the period April 1 to December 31, 2020, he paid interest of $2,900 on a car loan. Operating costs for the entire year for both vehicles were $7,500. All vehicle costs were personally paid for by Jack and were not included in the calculation of Gordon's Appliances' net income. During the year, Jack drove 24,000 kilometres, of which 10,000 were for business purposes.
8. The income from operating activities includes the following deductions:
Amortization/depreciation of tangible assets $32,000
Amortization of goodwill 2,000
Rent 26,000
Travel (note 1) 11,000
Radio and TV commercials (note 2) 22,000
Conventions (note 3) 4,200
Site investigation for new store 3,000
Cost of new computer software (class 12) 2,000
Bad Debt expense (note 4) 16,000
Salary and wages (note 5) 176,500
Meals and entertainment (note 6) 12,000
Charitable donations (note 7) 2,900
Warranty expense (note 8) 15,000
Legal (note 9) 34,100
Interest (note 10) 18,000
Notes:
1. Jack's spouse sometimes accompanies him while travelling. Costs relating to her travels totalled $3,400.
2. Included in the radio and television commercial amount is a payment of $8,000 made to a local television station for 50 thirty-second adds to be aired over the next 12 months. As of December 31, 2020, 35 of these ads have been aired. Also included is a payment of $2,000 made to a US radio station for radio ads played during 2020. Jack wants to increase his online sales to the US market and has been advertising his products to American customers.
3. Jack attended two conventions this year. Both conventions included an amount of $500 each for meals and entertainment.
4. Most of Gordon Appliances' sales are on account. Last year's tax return shows a reserve for bad debts of $15,000. In 2020, bad debts of $22,000 were written-off. Jack estimates that a reserve of $12,000 would be appropriate this year.
5. Salary and wages include the following:
Wages paid to store employees $130,000
Salary paid to his wife 25,000
Bonus declared to employees 15,000
Car allowances paid to employees 6,500
Jack pays a salary to his wife for maintaining his personal home and doing all of his shopping, cooking and cleaning. Jack is a busy man and if his wife did not take care of these household chores, he estimates the amount he would have to pay someone to do all of this work would be much more expensive.
All employee bonuses relate to work done in 2020. Of the total, $5,000 has been paid in 2020, $4,000 will be paid at the end of February 2021 and the remainder is payable at the end of August 2021.
One of the store employees must sometimes use his own vehicle to deliver products to clients. Gordon appliances pays $0.65 for every kilometer driven to compensate the employee for the use of his car. Total amount paid to the employee was calculated as 10,000 km x $0.65 = $6,500. (Note: For tax purposes, the maximum allowable car allowance is $0.59 for the first 5,000 kilometres driven and $0.53 for any additional kilometres)
6. Meals and entertainment included a $3,900 membership to a social club where Jack often entertains clients. The other $8,100 is for meals and entertainment costs incurred while conducting business with clients.
7. All charitable donations were made to registered Canadian charitable organizations. Jack received appropriate receipts for all of his donations.
8. A contingent reserve for possible defective appliances of $15,000 was recorded as a charge against cost of sales. During the year, Gordon Appliances spent $5,600 repairing products that had been returned under warranty.
9. Legal fees included the following:
Legal fees to defend against a client lawsuit $2,700
Reserve for potential loss of lawsuit 30,000
Life insurance premiums on Jack's life 400
Appraisal fee on property used as collateral for a business loan 1,000
10. Interest expense included $14,000 on mortgages for the stores and $700 from a temporary bank loan of $12,000. The bank loan funds were in turn loaned to Jack's brother interest free. Jack's brother has a poor credit rating and is unable to borrow from any bank or other financial institutions.
Required - Calculate Gordon's Appliances income from business for tax purposes for the year ended December 31, 2020. Your calculations should include any taxable gains or allowable capital losses that occurred during the year.