Assignment 1 Summer 2020 Taxation Question 1

Your client, Furnace Parts Ltd., a Canadian-controlled private corporation, has prepared its own financial statements for the year ended December 31, 2019. The financial statements are not necessarily in accordance with generally accepted accounting principles.

The following information was provided by Furnace Parts Ltd.'s accountant who prepared the financial statements:

1. Accounts receivable — The company provides an allowance for doubtful accounts for accounting purposes, based on historical experience, equal to 4% of gross receivables.

The actual doubtful accounts, based on a review of the aged listing, were $2,200 and $6,300 at December 31, 2018 and 2019, respectively.

2. Inventory — The inventory is valued at cost which is determined on a direct cost basis. One  particular line of parts which is included in inventory has a market value of nil but is recorded on the books at $35,000. The write-down has not been recorded since the total cost of inventory is less than the total market value.

3. Capital assets, net of amortization-

The company began the construction of a building to house their manufacturing operations in September 2019. The building has an estimated completion date of May 2020.

The company replaced its computer hardware in 2019. The old equipment was depreciated to a net book value of $42,000 and its disposition resulted in a loss of $17,500. The old computer hardware was included in Class 10 for CCA purposes.

The company purchased a piece of manufacturing equipment during the year for S 155,060.

There were no other additions or deletions of capital assets during the year. The closing UCC's at December 3 1, 2018 were:

Class 8        $25,000

Class 10        26,000

Class 43      410,000

4. Purchases- During the year the company bought $32,000 worth of new furniture for the office.

5. Goodwill — The company had a valuation completed by an independent valuator early this year. The valuation identified that the company had goodwill of $1,200,000. The company recorded the goodwill in order to enhance the financial position of the company to potential investors.

6. Accounts payable — Accounts payable at December 31, 2019 included bonuses payable to employees unrelated to the company of $25,000 and bonuses payable to employees related to the company of $35,000. The bonuses were considered reasonable and were paid on June 30, 2020 before the 2019 tax returns were filed.

7. Insurance Expense- As a result of the bank demanding collateral security on the bank loan which Furnace Parts Ltd. had during the year the company paid $300 Life Insurance on the President of the company each month starting January l, 2019. The bank loan was paid off on October 31st, 2019.

8. Legal Expense- In 2017 Furnace Parts Ltd spent $10,000 in legal fees where the company raised $50,000 in capital by issuing more shares to buy more assets for the company.

Required:

Determine the minimum Division B income for tax purposes of Furnace Parts Ltd. for the year ended December 31, 2019.