Question

Jenny Jones operates a T-shirt distribution business as a sole proprietor. The following is

Jenny’s income statement, for the calendar year ended December 31. Jenny is registered for

HST purposes. All numbers shown below are excluding HST.

Statement of Income

For the year ended December 31

Gross revenue $60,000

Cost of goods sold (10,000)

Gross profit 50,000

Expenses

Accounting & legal $2,000

Advertising 800

Golf dues 3,000

Reasonable estimated bad debt expense 2,000

Business taxes and insurance 1,000

Amortization of fixed assets 8,000

Cycle Safety Program 1,200

Interest 7,800

Meals and entertainment 4,000

Office rent 3,200

Salaries and wages – staff 6,000 (39,000)

Net income per financial statements $11,000

Notes:

1. Legal fees include $500 of estimated fees for a pending lawsuit against Jenny for the

sale of distasteful T-shirts.

2. Accounting fees include the purchase of a $1,200 computerized cash register.

3. Interest expense includes $3,000 paid to the CRA for late instalment interest.

4. The Cycle Safety Program cost was for Jenny, who is an active environmentalist and

rides her bicycle to work every day.

5. Included in the cost of goods sold is $3,200 paid for shelving and lighting in her sales

showroom.

6. A sale of Disney logo rights is not included in the financial statements. Jenny actively

trades rights for t-shirt logos. Net proceeds from the sale of the Disney rights were

$15,000, and the cost of the Disney logo rights to Jenny was $6,800.

Required:

1. Compute Jenny’s income from business for tax purposes, before CCA, for the year

ended December 31.

2. For any item of expense that is not included in your adjustments, list it and explain why

no adjustment is needed.

Answer 1

1. Computation of Jenny’s income from business for tax purposes, before CCA, for the year ended December 31.

Particulars	Amount
Gross Revenue	60000
Add:Income from Sale of the Disney Rights	15000
Less: Cost of Goods Sold(10000-3200)	6800
Less:Cost of Goods Sold of Disney Rights	6800
Gross Profit	61400
Less:Expenses
Accounting and Legal(2000-1200)	800
Advertising	800
Reasonable Estimated Bad Debt Expense	2000
Business Taxes and Insurance	1000
Interest(7800-3000)	4800
Meals and Entertainment(4000*50%)	2000
Office Rent	3200
Salary & Wages	39000
Net Profit before claiming CCA	7800

Following items have not been included in above calculation

• Amount Of $3200 paid for shelving and lighting -It is considered as fixtures and hence should be capitalised.
• Amount of $1200 paid for Computerised Cash register has been reduced as it will be considered as capital expenses because value from this register will be derived for several years.
• Golf Dues of $3000 and Cycle Safety Program cost has not been taken into account as these are personal expenses.
• Interest Expenses paid to CRA are not allowed hence deducted from total interest.
• Meals and Entertainment to the extent of 50% is considered as allowable expenditure.
• Salary and Wages paid to all i.e. staff as well as family member is allowed to be deducted for tax purpose.