Mock Common Final Examination

Day 3
ABC Day Care Centre
(Booklet #1 – Case)

Examination Details
The examination consists of:

Booklet #1 – (this booklet)

Case #1 (85 minutes)
Booklet #2 – Rough notes

The case should be answered in Word and Excel. The main body of your response should be
in Word. Only supporting calculations should appear in Excel, within a single worksheet.

Answers or part answers will not be evaluated if they are recorded on anything other than
Word or Excel. Rough-note paper is available in a separate booklet. Rough notes, and
any other annotations made in the exam booklet will not be evaluated.

The CPA Canada Handbooks and the Income Tax Act, in the form of searchable PDF files, are
available on your computer during the exam if you have Securexam installed (Program Files /
Software Secure, Inc / Securexam Student / PDFDocumentViewer.exe). These PDF files
provide the standards in effect and tax laws enacted at December 31, 2017.

A tax shield formula and other relevant tax information are available at the end of this booklet.
Mock Common Final Examination Day 3 Page 2

Case #1 (Suggested time 85 minutes)

ABC Day Care Centre (ABC) is a licensed day care facility with three locations operating in
Brampton, Ontario. ABC’s mission is to provide a safe, inclusive and stimulating early learning
environment for toddlers and preschool children that promotes each child's social, emotional,
physical and cognitive development. You, CPA, were just hired by ABC’s owner, Kimiko Hahn,
to provide some advice. It is now July 21, 2018 and you meet with Kimiko in her office.

“We have quite a few items to discuss CPA. We are excited to announce that we are planning
to expand our operations by opening an indoor playground by January 2019, catering to
entertaining children ages 2 to 10. The playground will be supervised by parents, and we will
sell snacks and beverages, such as fruit, crackers, chocolate bars, pop and milk. We need your
help to determine how to price admission to the playground. Here’s the information you need
(Appendix I).

“As well, we are debating whether to include a rock climbing centre to entice families with older
kids as there is significantly more risk associated with this equipment. Please classify and
assess the risk response alternatives (Appendix II) that we have identified to manage those
risks. Remember to quantitatively assess each alternative, ignoring the initial cost of the
equipment, to determine our best course of action.

“I think we should use the playground facility to run weekly supervised summer day camps. I
need you to explain the HST implications of opening the playground and running the day camps
since we are not registered for HST with the day care centres.

“We have some profitability concerns about our existing day care operations that we need to
resolve. It’s difficult to tell where the problems are due to the integrated nature of our
operations. Here’s some financial information (Appendix III) so you can assess the pre-tax
profitability of each location.

“Recently, some parents posted negative feedback about us on Twitter. We’re not sure what’s
going on but it sounds like we’re not operating in line with our mission. We need you to
evaluate the tweets (Appendix IV) and their impact. Don’t forget to provide recommendations to
improve our operations, if necessary.

“We want to convert our check-in process to an automated system. Please review the proposed
system (Appendix V) to determine if there are any control weaknesses, and provide
recommendations to fix those weaknesses.

“Lastly, one of the parents on our advisory committee recently divorced and has shared custody
of her children. She wants to understand her personal tax implications of the day care costs for
her 4-year old and the day camp costs for her 8-year old. Can you give me some basic advice
for her on this issue?”

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Mock Common Final Examination Day 3 Page 3

APPENDIX I
INDOOR PLAYGROUND

Industry information on indoor playgrounds indicates that adults are usually provided with free
admission on entry with a child. Children under two years of age are usually provided with
admission at half price.

Based on a price between zero and $13.00, the following probability distribution applies for
admissions:

Total Annual Admissions Probability

20,000 to 25,000 0.15
25,001 to 30,000 0.25
30,001 to 35,000 0.35
35,001 to 40,000 0.15
40,001 to 45,000 0.10

Expected admissions are as follows:

 35% for children two years of age and under

 50% for children over two years of age
 15% for adults

Total operating costs are mixed between fixed and variable costs. The total operating costs are
expected based on the following levels of admissions:

Total Annual Admissions Total Operating Costs

20,000 $200,000
35,000 $225,050
50,000 $250,100

ABC expects to earn an annual pre-tax profit of $50,000 from the indoor playground. Kimiko is
not sure if this expansion plan is viable since competitors charge a full price admission of
$12.50 per child.

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Mock Common Final Examination Day 3 Page 4

APPENDIX II
ROCK CLIMBING CENTRE

ABC plans to operate the indoor playground from 10 am to 7 pm, 360 days of the year. The
addition of a rock climbing centre for older children would attract approximately 75 more children
per month at the same rate charged for the playground.

There are several alternatives to manage the additional risks:

1. The insurance company would charge an additional $700 per month to include the rock
climbing centre.

2. The insurance company would not require an additional charge if the indoor playground
staffed the rock climbing centre with one employee full-time. Staff will be paid $15 per
hour.

3. ABC would settle any lawsuits that resulted from injuries. Lawsuits are expensive,
settling at roughly $7,500 each, with the probability of at least one injury per year.

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Mock Common Final Examination Day 3 Page 5

APPENDIX III
FINANCIAL INFORMATION

ABC has three locations – Mount Pleasant, Bramalea and Royal Garden. Day care centres in
Ontario are required to have a minimum child to staff ratio of 4:1 for toddlers and 8:1 for
preschoolers.

Revenue

 ABC charges $75 per day per toddler and $50 per day per preschooler. The average
ratio tends to be 30% toddlers and 70% preschoolers. The average attendance is 240
days per year.

 Mount Pleasant’s enrolment is 50 children, Bramalea has 40 children, and Royal Garden
has 30 children.

Costs

 Day care staff are paid $18.75 per hour (including benefits) and typically work 8-hour
days. Staff are assigned to either a toddler room or a preschool room since toddlers and
preschoolers are never in the same group.

 ABC also employs full-time supervisors at each site that are paid $40,000 (including
benefits) annually. Mount Pleasant has two supervisors and there is one supervisor at
each of the other locations.

 Supplies cost $120,000 annually and are equally dispersed by Kimiko among each
location.

 Maintenance and cleaning totals $40,000 annually. Royal Garden costs $4,000 more
than the other locations annually to maintain and clean as it is an older facility.

 Food services cost $160,800 annually. Students are served one meal and two snacks
each day.

 Monthly lease costs are $8,000 at Mount Pleasant, $7,100 at Bramalea and $6,600 at
Royal Garden.

 Kimiko is paid a salary of $65,000 (including benefits) to oversee the company’s

operations. ABC also employs an office administrator, who is paid a salary of $48,000
(including benefits) to process registrations and manage day care centre operations,
such as personnel and site visitations. Neither Kimiko nor the administrator track their
time spent by location.

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Mock Common Final Examination Day 3 Page 6

APPENDIX IV
TWITTER FEEDBACK

@Momof5
- @ABCBramalea when I picked up my son today, the classroom was filthy and smelled
horribly. I can’t imagine playing in that environment all day. He better not get sick.

@Jennyteaches
- My daughter came home crying today because she was being teased
@ABCRoyalGarden. As a teacher myself, this is not the atmosphere I encourage for
early learning.

@Stayhomedad
- @ABCBramalea this is the third day in a row that my son has come home hyper after
being stuck inside. Don’t you get these kids outside to run around at all?

@Carriereads
- @ABCMtPleasant my daughter said that there hasn’t been story time for the past two
weeks. Is she telling the truth, or don’t you think that reading is a good way to teach kids
literacy?

@Donewiththis
- @ABCRoyalGarden your staff are rude to the kids. They don’t model good behaviour
and just shout commands at them. I’m pulling my twins out as soon as I find a new day
care for them.

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Mock Common Final Examination Day 3 Page 7

APPENDIX V
PROPOSED CHECK-IN SYSTEM

The automated check-in system requires a tablet computer and printer for each location, which
must be connected to a wireless internet network. ABC will need to set up each child in the
system, including all personal information and caregiver information before implementing the
automated system. ABC plans to use its public wireless internet connection to give parents a
mobile check-in option.

The system is meant to protect a child from being dismissed without an approved caregiver
signing out the child. It also provides records of attendance and check-out that can be referred
to in the case of an incident.

When a caregiver drops off their child, they will need to provide the child’s phone number to the
day care staff to call up the child on the system. When there are multiple children under the
same phone number, staff can then select which child is being checked in. Alternatively,
caregivers can check-in the child via the mobile check-in app. The system will print a bar coded
ticket and sticker for each child checked in. The ticket is given to the caregiver and the sticker is
placed on the child’s clothing.

When the child is picked up, the day care staff must scan the bar-coded sticker on the child and
the bar coded ticket to check-out the child from the system. Quite often, different caregivers will
drop off and pick up the children. All children must be shown as checked out on the system
before day care staff can leave at the end of the day.

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Mock Common Final Examination Day 3 Page 8

END OF EXAM

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Mock Common Final Examination Day 3 Page 9

CPA COMMON FINAL EXAMINATION REFERENCE SCHEDULE

1. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS

a) Present Value of Total Tax Shield from CCA for a New Asset
= CTd 2 + k = CdT 1 + 0.5k
(d + k) 2(1 + k) (d + k) 1 + k

Notation for above formula:

C = net initial investment
T = corporate tax rate
k = discount rate or time value of money
d = maximum rate of capital cost allowance

2. SELECTED PRESCRIBED AUTOMOBILE AMOUNTS

2017 2018
Maximum depreciable cost — Class 10.1 $30,000 + sales tax $30,000 + sales tax
Maximum monthly deductible lease cost $800 + sales tax $800 + sales tax
Maximum monthly deductible interest cost $300 $300
Operating cost benefit — employee 25¢ per km of 26¢ per km of
personal use personal use
Non-taxable automobile allowance rates
- first 5,000 kilometres 54¢ per km 55¢ per km
- balance 48¢ per km 49¢ per km

3. INDIVIDUAL FEDERAL INCOME TAX RATES

For 2017

If taxable income is between Tax on base amount Tax on excess

$0 and $45,916 $0 15%
$45,917 and $91,831 $6,887 20.5%
$91,832 and $142,353 $16,300 26%
$142,354 and $202,800 $29,436 29%
$202,801 and any amount $46,966 33%

For 2018

If taxable income is between Tax on base amount Tax on excess

$0 and $46,605 $0 15%
$46,606 and $93,208 $6,991 20.5%
$93,209 and $144,489 $16,544 26%
$144,490 and $205,842 $29,877 29%
$205,843 and any amount $47,670 33%

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Mock Common Final Examination Day 3 Page 10

4. SELECTED INDEXED AMOUNTS FOR PURPOSES OF COMPUTING INCOME TAX

Personal tax credits are a maximum of 15% of the following amounts:

2017 2018
Basic personal amount $11,635 $11,809
Spouse, common-law partner, or eligible dependant 11,635 11,809
amount
Age amount if 65 or over in the year 7,225 7,333
Net income threshold for age amount 36,430 36,976
Canada employment amount 1,178 1,195
Disability amount 8,113 8,235
Canada caregiver amount if infirm dependants 18 & over 6,883 6,986
Net income threshold for caregiver amount 16,163 16,405
Adoption expense credit 15,670 15,905

Other indexed amounts are as follows:

2017 2018
Medical expense tax credit – 3% of net income $2,268 $2,302
ceiling
Annual TFSA dollar limit 5,500 5,500
RRSP dollar limit 26,010 26,230
Lifetime capital gains exemption on qualified small
business shares 835,716 848,252

5. PRESCRIBED INTEREST RATES (base rates)

Year Jan 1. - Mar. Apr. 1 - June 30 July 1 - Sep. Oct. 1 - Dec. 31

31 30

2018 1 2
2017 1 1 1 1
2016 1 1 1 1
2015 1 1 1 1

This is the rate used for taxable benefits for employees and shareholders, low-interest
loans, and other related-party transactions. The rate is 4 percentage points higher for late
or deficient income tax payments and unremitted withholdings. The rate is 2 percentage
points higher for tax refunds to taxpayers, with the exception of corporations, for which the
base rate is used.

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Mock Common Final Examination Day 3 Page 11

6. MAXIMUM CAPITAL COST ALLOWANCE RATES FOR SELECTED CLASSES

Class 1 ...................................... 4% for all buildings except those below

Class 1 ...................................... 6% for non-residential buildings acquired for first
use after March 18, 2007
Class 1 ...................................... 10% for manufacturing and processing buildings
acquired for first use after March 18, 2007
Class 8 ...................................... 20%
Class 10 .................................... 30%
Class 10.1 ................................. 30%
Class 12 .................................... 100%
Class 13 .................................... Original lease period plus one renewal period
(minimum
5 years and maximum 40 years)
Class 14 .................................... Length of life of property
Class 14.1................................. 5% for property acquired after December 31, 2016
Class 17 .................................... 8%
Class 29 .................................... 50% Straight-line
Class 43 .................................... 30%
Class 44 .................................... 25%
Class 50 .................................... 55%
Class 53 ................................... 50%

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