ASSIGNMENT: 1

SUBMITTED BY: REEMA SAJU

STUDENT ID:301119165
SUBMITTED TO: [Link] KOHLI

QUESTION:
  Samson Enterprises Ltd. achieved a profit in 20X1 of $120,000. The income statement is
summarized below.

Sales $1,300,000
Cost of sales 780,000
Gross profit 520,000
Administrative and selling expenses 451,000
69,000
Other income (expenses) 51,000
Net income before tax $ 120,000

Certain details of the summarized income statement are provided below.

1. Administrative and selling expenses include the following:

(a) Donations to registered charities $ 3,000

(b) Amortization/depreciation of tangible assets 12,000

Note 1: At the end of the previous year, the undepreciated capital cost of certain asset
classes was as follows:

Class 1 $80,000
Class 8 32,000
Class 10 50,000

Note 2: During the current year, the company sold its land and building for $150,000
(land $40,000, building $110,000) and moved into leased premises. The original cost of
the property was $130,000 (land $30,000, building $100,000). The building had an
accounting book value of $70,000 at the time of sale.

Note3: The company owns several pieces of equipment. During the year, one unit that
originally cost $10,000 and had a book value of $6,000 was sold for $8,000.

(c) Legal fees:

• Settling a dispute relating to the purchase of defective 4000

merchandise for sale
Reorganizing the corporation’s share capital 8,000

(d) Amortization 9,000

Note: The current year’s amortization expense applies to a number of intangible assets.
• During the previous year (20X0), the company took over a competitor and purchased
goodwill for $40,000 and a franchise (unlimited life) for $10,000.
• During the current year, the franchise was sold for $8,000 when its book value for
accounting purposes was $9,000. In addition, the company purchased an existing patent
 from a competitor for $20,000. The patent with a remaining legal life of 10 years was purchased on
the first day of the current year.

2. Other income (expenses) includes the following:

Gain on sale of land $10,000
Gain on sale of building 40,000
Gain on sale of equipment 2,000
Loss on sale of franchise (1,000)
$51,000

Required:

Determine the net income for tax purposes of Samson Enterprises for the 20X1 taxation year.
SOLUTION:

Analysis of Cumulative Eligible Capital:

The opening balance was not provided. It must be determined from its inception in the previous year
(20X0).

20X0
Purchased Goodwill (3/4) of $40,000 $30,000
Purchased franchise (3/4) of $10,000 7,500
37,500
Assumed write-off in 20X0 (7%) (2,625)
Balance at end of 20X0 34,875

20X1
Addition - legal fees for share reorganization (3/4) of $8,000 6,000
Reduction - franchise sale (3/4 of $8,000) (6,000)
34,875
20X1 write-off - 7% of $34,875 (2,441)
$32,434

Analysis of Depreciable Property:

Class: 1(4%) 8(20%) 10(30%) 44(25%)

Opening balance $ 80,000 $32,000 $50,000 0

Additions (patent) $20,000
Disposals (100,000) (8,000) 0 0
(20,000) 24,000 50,000 20,000
20X2 CCA (4,800) (15,000) (2,500)*
20X2 Recapture 20,000 . . .

0 $19,200 $35,000 $17,500

* Note: $20,000 x 1/2 x 25% = $2,500. The taxpayer can elect to treat the patent as Class 14 with CCA
on a straight-line basis (10 years), (or some other reasonable amount based on economic value)
without applying the one-half rule.

Sale of Land and Building (Capital Portion):

Land Building Total

Proceeds $40,000 $110,000 $150,000

Cost (30,000) (100,000) (130,000)

Capital Gain $10,000 $ 10,000 $ 20,000

Taxable ½ of $20,000 $ 10,000

 Net income for tax purposes:

a) Income from business:

Income per financial statement [ITA 9(1)] $120,000
b)
Add: Donations [ITA 18(1)(a)] 3,000
Legal
c) fees - reorganization of share capital [ITA 18(1)(b)] 8,000
Amortization (tangible assets) [ITA 18(1)(b)] 12,000
Amortization (other) [ITA 18(1)(b)] 9,000
Accounting loss on sale of franchise [ITA 18(1)(b)] 1,000
Recapture of capital cost allowance [ITA 13(1)] 20,000
173,000
Deduct:
Capital cost allowance: (4,800 + 15,000 + 2,500) [ITA 20(1)(a)] (22,300 )
Eligible capital property write-off [ITA 20(1)(b)] (2,441)
Accounting gain on sale of - land (10,000)
- building (40,000)
- equipment (2,000)

Net income from business 96,259

b) Taxable capital gains 10,000

Net income for tax purposes $106,259