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GOBC Real Estate • Property Management • Mortgage Class Notes

3.1
FINANCIAL STATEMENTS

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 3.1 Financial Statements
Types of Businesses
Sole Proprietorship (SP)
General Partnership (GP)
Limited Partnership (LP)
- made of general and limited partners
- Limited partners have no right to take
part in day-to-day operations; it is the
general partners who run the business
Corporation (Corp)
“ never dies”
Company exists until it is terminated
by an act of ALL shareholders
Public or Private ***
PREC- Personal Real Estate
Corporation
Main Purpose/advantage:
income/tax planning
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OWNERSHIP
An individual (sole)
- cannot separate business and
personal
2 + partners
- cannot separate business and
personal
1 + general partners
– cannot separate business and
personal
- unlimited liability
1 + limited partners
– cannot separate business and
personal
- limited liability
Fictional person -separate legal
entity
Shareholders limited to their own
equity
Board of Directors manages the
company NOT the shareholders
BENEFITS:
1. Business taxation: better
business accounting/expenses
2. Income splitting: non-voting
shares can go to the spouse and
children, reduces taxes payable
3. Tax deferral: income may be
retained in the corporation, with
personal taxes only paid once
dividends are distributed
4. Lower tax rates for corporations
Shares are traded on stock
market - Public company***
LIABILITY
Unlimited
– the owner is personally
liable for all debts incurred
by the proprietorship
- creditors can go after
personal assets
Unlimited
- creditors can go after
personal assets; each
general partner becomes
personally liable for all GP
debts
General partners –
unlimited liability
creditors can go after
personal assets
Limited partners –liability
limited to their investments
- have NO right to take part
in day-to-day operations
Limited to corporation
Can sue or be sued
Individuals who acquire
shares in a company do not
own the assets of the
company
protects personal assets BUT
the licensee remains
personally liable for actions
related to provision of real
estate services
(may be covered by E&O
insurance)
TAX
- Profit and losses part of
owner’s taxable situation
- Must report business income
on their personal tax returns
- SP does not file its taxes
separately from the principal
- Each partner must claim
income/loss on their personal
income tax
- Must report business income
on their personal tax returns
- GP itself is Not Subject to
income tax
- All partners claim income/loss
according to their share in the
company
- Partners have the same
income tax status
(LP itself is NOT Subject to
income tax)
Taxable entity
Has its own income status
Subject to income tax
COSTS:
- accounting costs for both
establishing and maintaining a
PREC
- requires double the real estate
licensing fees
- requires double the errors &
omissions insurance
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 3.1 Financial Statements

Accounting Principles

1) Cost Principle “Historic Cost Principle” - record the amount paid for an asset (what you paid for, at the time of a
purchase )

Joe buys a car for his real estate business. What amount should be recorded in his firm’s accounts?
1. ICBC’s insurable value is $60,000
2. List price was $68,000
3. Joe negotiated and paid $62,000
4. The car’s market value is appraised at $63,000

2) Revenue Recognition Principle - revenue should be recognized (put into the books) when earned, not
necessarily when received.

Joe has helped sell a property and gets a $10,000 commission.

1. Dec 1, 2021: subject clauses are removed, and deposit paid
2. Jan 15, 2022: completion date ($$$ paid)
3. Are taxes payable in 2021 or 20212year? (2021 - when you earned)

3) Matching Principle - expenses should be recognized and deducted in the same period as the
revenues they generated. Recognized when incurred, not necessarily when paid.

4) Objectivity Principle - all amounts must be objective and verifiable (I.e. by a 3rd party)
Is closely aligned to the cost principle because the best way to ensure objectivity in accounting transactions is to
record the amount of consideration given up at the date of transaction

5) Consistency Principle - once a principle is adopted, it should be used in future years.

The changes to accounting principles should only be made where the change results in providing more relevant
and useful information to the user of the financial statements.

6) Materiality Principle - is an exception to the matching principle. The financial reports only have to include
information that will be significant (material) to the users

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 3.1 Financial Statements

FISCAL YEAR- Can never be changed at will!

Corporation tax year could be changed BUT

the tax year cannot be longer than 53 weeks

HINT: BAL in Balance

Financial Statements Balance sheet
Assets
Liabilities
BALANCE SHEET
listing of the assets, liabilities, FORMULA 1: Assets = Liabilities + Owner’s Equity
and owner’s equity of a business FORMULA 2: Shareholders equity = share capital + retained earnings
at a specific point in time
Current = used/off books within 1 year
Non-Current = not used/stays on books for more than 1 year
ASSETS – own

Cash, accounts receivable, pre-paid expenses, inventories $5,000 current (used within 1yr)
Car, land, buildings $20,000 non-current (more than 1 yr)
TOTAL ASSETS $25,000

LIABILITIES – owe
Credit Card Payable, accounts payable, wages payable, $4,500 current (will pay in 1 yr)
taxes, payable, tenants deposit
Car Loan Payable, mortgage $15,000 non-current (more than 1 yr)
TOTAL LIABILITIES $19,500

OWNER’S EQUITY
Joe, Capital NO shareholders names will be shown on Corporation $5,500
TOTAL LIABILITIES & OWNER’S EQUITY $25,000

Shareholders equity = share capital + retained earnings

INCOME STATEMENT
listing of revenue and expenses of
a business for a given period Revenues - Expenses = NET Income

RR corporation, for the year ending Dec 31, 2021 (see question below)

REVENUES
Sales Commissions, interest, service, rent revenue $66,000 (15 x 4,400)

EXPENSES
Cost of production $16,500 (1,100 x 15)
Operation expenses $31,000
Interest payments $3,500
Income taxes $7,500
Car- Depreciation In the statement of cash flows, $0________________
changes in depreciation $7,500- NET Income (Profit)
expense be recorded under
Operating activities NEW
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 3.1 Financial Statements
Straight Line Depreciation (SLD) - not tax deductible (cannot deduct this from income)
Cost − Salvage Value
Depreciation – Two Methods: Annual Depreciation Expense =
Estimated Life

Land NEVER
Example: 20,000-2,000 = 18,000 / 10 depreciates!
Car cost $20,000
= 1,800 !!
Economic life 10 yrs
Salvage value $2,000 Annual Line Depreciation

Depreciation Expense- method used to allocate the cost of asset over time

Capital Cost Allowance

(CCA) – tax deductible (can deduct this from income)
1st year rule: only ½ of available CCA% can be deducted in the 1st year
Last year rule: NOTHING can be deducted (0%)

Sample CCA Classes:

Class CCA Rate Description
1 4% Buildings
8 20% Furniture, equipment, appliances
10 30% Automobile, Truck (for business)

Example: Car - Class 10 - Asset (30% CCA rate)

Undepreciated Capital Cost (UCC) = $20,000

CCA deduction (UCC x CCA rate) = 20,000 x 15%= $3,000 - 1st year CCA deduction

2nd year: 3rd year:

Book Value = 17,000 (20,000-3,000) Book Value = $11,900
CCA = $5,100 (17,000x30%) CCA = $3,570 (11,900x30%)
17,000-5,100=11,900 11,900-3,570= 8,330

Book Value – original cost of your asset minus depreciation to date

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 3.1 Financial Statements
MY NOTES:

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 3.1 Financial Statements
Notes Questions
1). A sole proprietorship does not file its taxes separately from the principal.
(1) True
(2) False

2). A sole proprietorship is the least common small business ownership model in service industries and has a lifespan that can
exceed that of its owner
(1) True
(2) False

3). Limited partners have liability to creditors which is limited to the amount of money that they have invested in the business
(1) True
(2) False

4). Limited partners, because they are not involved in the day-to-day operations of the business, are taxed at lower rate than
general partners with respect to dividend distributions.
(1) True
(2) False

5). Limited partners, can be actively engaged in managing the business without any consequences to their partnership status
(1) True
(2) False

6). Which of the following is a characteristic of a corporation?

(1) A corporation cannot be sued.
(2) A corporation whose shares are traded on a stock exchange is referred to as a private company.
(3) A corporation is subject to corporate dividend tax instead of income tax.
(4) A corporation is a separate legal entity

7). To conform to the Cost principle, it is important to record the asset at what might be considered its fair market value instead
of what the enterprise paid for it.

(1) True
(2) False

8). The Matching principle requires that expenses are always recorded when they are paid, which is not necessarily when they
were incurred.

(1) True
(2) False

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 3.1 Financial Statements
9). The Revenue recognition principle states that a business enterprise should recognize revenue when it is earned, not
necessarily when the cash is received.

(1) True
(2) False

10). The Consistency principle holds that changes to accounting principles should only be made when the change results in
providing more relevant and useful information for the user of the financial statements.

(1) True
(2) False

11). The Consistency principle holds that once a business enterprise adopts one general accounting principle from the number
of the alternatives, that enterprise should not follow that same principle in subsequent years.
(1) True
(2) False

12). The Materiality principle is the same as the matching principle where purchases with relatively low cost, such a stationary
or cleaning supplies, may be added to the books when paid for.
(1) True
(2) False

13). Which one of the following items will NOT be found on the Balance Sheet of a corporation?

(1) Retained earnings to date

(2) Names of the corporation shareholders
(3) Original cost of the property owned by the corporation
(4) Number of the shares issued

14). On the balance sheet, inventories would be classified under:

(1) current assets
(2) current liabilities
(3) non-current assets
(4) non-current liability

15). Which of the following is a liability on a financial statement?

(1) depreciation expense

(2) accumulated depreciation
(3) salaries payable
(4) both (1) and (3)

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 3.1 Financial Statements
16). Current assets on the financial statements of a business include:

(1) land.
(2) rents receivable.
(3) real property at its historic cost.
(4) accounts payable

17). How would prepaid expenses and income taxes payable be classified on the Balance Sheet?

(1) Prepaid expenses – current assets; income taxes payable – noncurrent liabilities
(2) Prepaid expenses – current assets; income taxes payable – current liabilities
(3) Prepaid expenses – noncurrent assets; income taxes payable – noncurrent liabilities
(4) Prepaid expenses – noncurrent assets; income taxes payable – current liabilities

18). How would wages payable and accounts receivable be classified on the Balance Sheet?
(1) Wages Payable
(2) Account Receivable

19). A company has just bought a truck for $22,500. It is expected that the truck can be sold for $3,000 fifteen years from now.
The current market value of the vehicle is $27,000. Using the straight-line method, what is the annual depreciation
expense?

(1) $1,300
(2) $1,500
(3) $1,600
(4) $1,800

20). Fanny Mac Ltd. purchased a small commercial building for $225,000 of which $100,000 was the value of the land. Fanny,
the company president, felt this was an excellent deal because she would have been willing to pay as much as $250,000.
One year later Fanny sold the property for $300,000. If, at the time of purchase, the expected economic life of the building
was 10 years, there was an estimated salvage value of $25,000 at the end of that time, and Fanny uses the straight-line
depreciation method, what is the depreciation expense for the year?

(1) $10,000
(2) $12,500
(3) $20,000
(4) $25,000

21). A company pays $97,835 for an asset on which the Income Tax Act allows capital cost allowance at 5% per year. The asset
is expected to have a useful life of 25 years and will have no salvage value at the end of this time. Calculate the depreciation
expense for accounting purposes for the asset's third year if the accountant chooses to use straight-line depreciation.

(1) $3,913.40
(2) $4,414.80
(3) $4,891.75
(4) $4,505.41

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 3.1 Financial Statements
22). Which of the following statements regarding capital cost allowance (CCA) is FALSE?

(1) Only one-half of the maximum allowable CCA may be claimed on an asset in the year the asset is purchased.
(2) No CCA may be claimed in the year of the asset’s disposal.
(3) The maximum CCA in a given year is equal to the depreciation expense multiplied by the CCA percentage.
(4) The CCA percentage rate is determined by the Canada Revenue Agency.

23). ABC Inc. paid $155,000 for an asset on which the Income Tax Act allows capital cost allowance (CCA). The asset was
purchased five years ago, and will be disposed at the end of this year. How much CCA will be claimed by ABC Inc. at the end
of this year?
(1) $7,750
(2) $5,997
(3) $0
(4) $2,500

24). One year ago, Creative Fibres Company Ltd. purchased a new factory at a total cost of $1,500,000 (for the land and the
building). The owner, Martha, estimates that the factory will last for 35 years, at which time the salvage value will be
$10,000. The CCA rate applied to the building is 4%. Now it is the year end and she must prepare the company's tax returns.
If the income statement has a depreciation expense of $18,750 (using the straight-line depreciation method), what is the
building's capital cost allowance for the first year?

(1) $18,750
(2) $13,325
(3) $9,375
(4) $19,375

Q. Answers: 1(1), 2(2), 3(1), 4(2), 5(2), 6(4), 7(2), 8(2), 9(1), 10(1), 11(2), 12(2), 13(2), 14(1), 15(3), 16(2), 17(2), 18(1-CL, 2-CA),
19(1), 20(1), 21(1), 22(3), 23(3), 24(2)

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