Canadian Income Tax In fiscal year 2019, ABC Ltd. acquired raw lan for $150,000. The shareholders had been advised that this land would soon be approved for commercial development, causing it to increase in value significantly, and they had hoped to sell it within the next 12 months for a large profit. The Company rented the land for the whole of 2019 to a farmer as pasture, for an annual rent of $1,000. In 2019, it also paid $300 in property taxes and $4000 in interest on funds borrowed to purchase the land. In 2019, it also incurred $800 in legal fees defending itself against a lawsuit brought by its tenant. Unfortunately for the Company, the efforts o an environmental group lobbying against the development plans were successful. ABC sold the property for $125,000 in early 2020, whe it became clear that development would not be permitted. Calculate the Net Income (Loss) For Ta Purposes to be reported for each of 2019 and 2020 resulting from the transactions described above. 2019 2020 $0 income $0 income $800 loss $4,100 loss $29,100 loss $14,550 loss $14,550 loss $25,000 loss

Canadian Income Tax In fiscal year 2019, ABC Ltd. acquired raw lan for $150,000. The shareholders had been advised that this land would soon be approved for commercial development, causing it to increase in value significantly, and they had hoped to sell it within the next 12 months for a large profit. The Company rented the land for the whole of 2019 to a farmer as pasture, for an annual rent of $1,000. In 2019, it also paid $300 in property taxes and $4000 in interest on funds borrowed to purchase the land. In 2019, it also incurred $800 in legal fees defending itself against a lawsuit brought by its tenant. Unfortunately for the Company, the efforts o an environmental group lobbying against the development plans were successful. ABC sold the property for $125,000 in early 2020, whe it became clear that development would not be permitted. Calculate the Net Income (Loss) For Ta Purposes to be reported for each of 2019 and 2020 resulting from the transactions described above. 2019 2020 $0 income $0 income $800 loss $4,100 loss $29,100 loss $14,550 loss $14,550 loss $25,000 loss

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter8: Investing Activities

Section: Chapter Questions

Problem 17PC

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Gray Companys financial statements showed income before income taxes of 4,030,000 for the year ended December 31, 2020, and 3,330,000 for the year ended December 31, 2019. Additional information is as follows: Capital expenditures were 2,800,000 in 2020 and 4,000,000 in 2019. Included in the 2020 capital expenditures is equipment purchased for 1,000,000 on January 1, 2020, with no salvage value. Gray used straight-line depreciation based on a 10-year estimated life in its financial statements. As a result of additional information now available, it is estimated that this equipment should have only an 8-year life. Gray made an error in its financial statements that should be regarded as material. A payment of 180,000 was made in January 2020 and charged to expense in 2020 for insurance premiums applicable to policies commencing and expiring in 2019. No liability had been recorded for this item at December 31, 2019. The allowance for doubtful accounts reflected in Grays financial statements was 7,000 at December 31, 2020, and 97,000 at December 31, 2019. During 2020, 90,000 of uncollectible receivables were written off against the allowance for doubtful accounts. In 2019, the provision for doubtful accounts was based on a percentage of net sales. The 2020 provision has not yet been recorded. Net sales were 58,500,000 for the year ended December 31, 2020, and 49,230,000 for the year ended December 31, 2019. Based on the latest available facts, the 2020 provision for doubtful accounts is estimated to be 0.2% of net sales. A review of the estimated warranty liability at December 31, 2020, which is included in other liabilities in Grays financial statements, has disclosed that this estimated liability should be increased 170,000. Gray has two large blast furnaces that it uses in its manufacturing process. These furnaces must be periodically relined. Furnace A was relined in January 2014 at a cost of 230,000 and in January 2019 at a cost of 280,000. Furnace B was relined for the first time in January 2020 at a cost of 300,000. In Grays financial statements, these costs were expensed as incurred. Since a relining will last for 5 years, Grays management feels it would be preferable to capitalize and depreciate the cost of the relining over the productive life of the relining. Gray has decided to nuke a change in accounting principle from expensing relining costs as incurred to capitalizing them and depreciating them over their productive life on a straight-line basis with a full years depreciation in the year of relining. This change meets the requirements for a change in accounting principle under GAAP. Required: 1. For the years ended December 31, 2020 and 2019, prepare a worksheet reconciling income before income taxes as given previously with income before income taxes as adjusted for the preceding additional information. Show supporting computations in good form. Ignore income taxes and deferred tax considerations in your answer. The worksheet should have the following format: 2. As of January 1, 2020, compute the retrospective adjustment of retained earnings for the change in accounting principle from expensing to capitalizing relining costs. Ignore income taxes and deferred tax considerations in your answer.
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