Question

Royal West Airlines Ltd.
Income Statement
For the Year Ended December 31, 2020
Sales revenue $2,561,096
Cost of sales (1,003,860)
Gross margin $1,557,236
Other expenses ( 890,743)
Net income, before income tax $ 666,493
Royal West Airlines is a regional airline that services Western Canada.
Notes:
a) $10,000 in legal fees relating to the restructuring of a debt.
b) A brand new airplane costing $65,000 used to service a new route
c) Interest on late municipal tax balances of $1,000
d) Sponsorship of a local musical production costing $9,240
e) Convention that was held in Barcelona, Spain costing $3,300
f) Interest expense of $4,000 that was associated with the acquisition of a GIC
g) Cost of sponsoring local hockey teams $500
h) Food and entertainment for clients $60,000
i) Life insurance premiums on the life of the president (required by the bank) $2,000
Item 1. During the year the Company spent $6,500 for landscaping its head office grounds.
For accounting purposes this cost was deducted in the year
Item 2. The Other Expenses account included the following amounts:
Item 3. The Other Income and losses account included the following amount:
$32,000 spent on a staff Christmas party where all employees were invited to
attend the event.
Item 6. All of Royal’s remaining capital assets are Class 1 which related to an office
building that was purchased in 2019. The UCC at the beginning of 2020 was $625,100.
On July 1, the Company added an additional room for $20,000. No Class 1 assets were
disposed of in the year.
Item 5. In 2020, the Company deducted $21,000 bad debt expense based on a review
of specific accounts.
Item 4. For tax purposes, the machinery that was sold was a Class 10 asset. All assets
in class were disposed of. The machinery was purchased for $15,000 and its UCC
balance at the beginning of 2020 was $10,250. The asset was sold in 2020 for
$14,600.
Required:
Complete the table below and show the adjustments that would be required in Royal West Airlines 2020
SCHEDULE 1 for each item listed in the question. For each item, show whether it adds to NITP by
marking “+” in the appropriate column, a “-“ mark if it subtracts from NITP, and a “na” mark if it is not
applicable.
Description
Addition (+)
Subtraction (-)
(na)
$ amount
Citation
Net Income for accounting
$666,493 9(1)
Item 1.
Item 2. a)
b)
c)
d)
e)
f)
g)
h)
i)
Item 3.
Item 4.
Item 5.
Item 6.

Answer 1

SHEDULE 1
Description	+/(-)/na	$ Amount Citation	Net Income for accounting $
Net Income before adjustment			6,66,493
Item 1) Landscaping head office ground as need to capitalise instead revenue expenditure	+	6,500
Item 2 )
a) Legal fees related to restructuring , as correctly treated as revenue expenses in operational	na
b) Capitalise brand new airplan	+	65,000
c) Interest on late municipal tax	na
d) Sponsership of musical production costing. It shoule be amortised with income	+	9,240
e) Convention at spain	na
f) Interest on acquiring GIS, as operating expenses	na
g) Promotion cost as social expenditure is allowed	na
h)Food and entertainment for clients	na
i) President insurance cost as required by bank	na
Item 3 (Assumed included in other expenses)
Staff xmass party expenses is allowed	na
Item 4
Assumed sales of capital assets included in sales	-	-14,600
Gain should be added (14600 - 10250 )	+	4,350
Item 5
Writing bad debt after review account is not justified. No need untill irrecoverable	+	21,000
and enough effort has been taken
Item 6
Asumed all new cost capitalised, so no needed transaction	na
Total Adjusted account	+		91,490
Net Income after adjustment in accounts			7,57,983