COMM_Midterm_May_2012%28solutions%291

The accountant would have booked the following dr

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The accountant would have booked the following: Dr. Contingent expense $40,000 (lawsuit lost) Cr. Contingent recovery $40,000 (lawsuit won) No net P&L impact...from a tax perspective, the damages won is taxable and the damages for the lawsuit lost is deductible, so no net tax impact GAAP = Tax Dr. Legal expense $8,900 Cr. Cash $8,900 To record the legal expense The legal expense is deductible tax=GAAP 10. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of $5,000 and appraisal fees of $2,000 related to this financing. The mortgage has a 10-year term and a 30-year amortization period. 20(1)(e) expense – deductible over 5 years, add back 4/5 + 5,600 +7,000 (1,400) 11
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11. In 2008, Nart issued 100 of its common shares to a third party investor for $25,000 per share. The legal expenses relating to the share issuance was $8,761 at that time. No tax consequence on the issuance of the $25,000 shares; however, the cost of $8,761 is a 20(1)(e) deduction over 5 years deduct 1/5 x 8,761 .... note that the expense was incurred in 2008 (1,752) 12. During the year, the company bought the shares of another company for $350,000. In completing this transaction, legal fees of $7,500 were incurred. Purchase of the company shares as well as the legal fees are capital in nature, not deductible...the $350,000 would have been capitalized and the legal fees would have been expensed. I would accept if you assume that the legal fees were capitalized too, so in this case, no adjustmenrt required. +7,500 13. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of $900. The interest charge was recorded in the income tax expense. The interest penalty is not deductible under 18(1)(t); however, we already added back the tax expense, so no adjustment required 14. Word processing computer software costing $750 and espresso machine costing $600 were purchased during the year. Since the amounts are below the capitalization threshold, the controller expensed these items. Both are capital in nature, not deductible, take CCA instead +750 +600 15. Depreciation expense on the fixed assets was $66,000. Not deductible under 18(1)(b) +66,000 12
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CAPITAL COST ALLOWANCE AND CUMULATIVE ELIGIBLE AMOUNT– Amount from Schedules 8 *****YOU MUST COMPLETE SCHEDULE 8 (IF APPLICABLE) IN ORDER TO RECEIVE ANY MARKS FOR THIS SECTION******* Show any work relating to Schedules 8 here: MINIMUM NET INCOME FOR TAX PURPOSES 13
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Additional space to show your work for computation of net income for tax purposes (if you need): 14
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  • Winter '10
  • TranCheung
  • Depreciation, Expense, Taxation in the United States, Nart

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