Question

Jordana is self employed in the T shirt distribution business, the following is Jordana’s income statement, for the calendar year ending December 31.

Statement of Income
For the Year ended Dec 31
Gross Revenue		60,000
Cost of Goods sold		(10,000)
Gross Profit		50,000
Expenses:
Accounting and Legal	2,000
Advertising	800
Golf Dues	3,000
Reasonable estimated bad debt expense	2,000
Business, taxes, and licenses	1,000
Amortization Expense	8,000
Cycle Safety Program	1,200
Interest	7,800
Meals & Entertainment	4,000
Rent and Lease	2,200
Office Rent	1,000
Salaries and Wages – Staff	6,000	(39,000)
		11,000

Notes

a)      Legal fees include $500 of accrued fees for a pending lawsuit against Jordana for the sale of distasteful T shirts

b)     Accounting fees include the purchase of $1,200 computerized cash register.

c)      Interest expense includes $3,000 paid to the CRA for late installment interest

d)     The Cycle Safety Program cost was for Jordana, who is an active environmentalist and rides her bicycle to work every day

e)     Included in the cost of goods sold is $3,200 incurred for the purchase of shelving and lighting.

f)       Due to the nature of transaction, the sale of Disney rights were not included in the financial statements. Jordana actively trades rights for T shirt logos. Net proceeds from the sale of the Disney rights were $15,000, and the cost of the logo rights was $6,800.

Required:

Jordana has asked you to calculate her income from a business for tax purposes, before CCA, for the calendar year ending Dec 31.

Answer 1

Answer to the above question is herein in below:

Before answering few concepts pointers:

1. Profit & Loss account deals for specific accounitng period for say 12 months in general, so transactions related to such period shall only be considered in the same.

2. Few Items are in the nature of capital Asset whose life is more than 12 months, they are balance sheet items as there usage is for more than one accounting period of 12 months

3. Firm & Entrepreneur are seperate entity & the expenses of the same shall not form part of Firm Profit & loss account. these are the few takeways to be remembered for better understanding.

	Sl no.	Particulars	Amount		Remarks for Understanding
		Net Profit as Calculated	11,000.00
		Add/Less Adjustments
	a)	Add: Advance for Lawsuit	500.00		The Expense Does not belong to current year. Its an advance. It’s a Balance Sheet Item. It shall be shown as Advance under Current Assets
	b)	Add: Computarised Cash Register	1,200.00		It’s an Asset. The useful life of the same is more than One year. It’s a Balance Sheet Item. It shall be Shown Under Assets. It can be Amortised as per the Applicable Accounting Standard
	c)	No adjustment			The Expense shall be charged to Profit & Loss A/c
	d)	Add: Cycle Safety program	1,200.00		Its Drawings as the expense is of personal Nature and does not belongs to the Firm. The Individual & Firm are separate entity. irrespective for Sole Proprietorship firm same PAN is used
	e)	No Adjustment			Although its administrative expenses. The Presentation would change but will still hit the Profit & loss account.
	f)	Add: Other Income	8,200.00		In P&L, it shall be shown as Other Income, Income deriving anceillary to the main Buisness. Assumption: Net Sale Proceeds of 15000 is not adjusted of the purchase cost of the Logo Rights.
		(15000-6800)
		Net Adjusted Profit	22,100.00