echnical & Ethical Issues with Tax Sky recently spoke to her father who is an experienced businessman because she isn’t sure about her revenues and costs for the past year. Her dad vehemently stressed the importance of a sole proprietor maintaining accurate records for business and tax purposes. Sky had grown impatient with the conversation and ended it but is now curious about what her father may have meant. In Sky’s opinion, as a sole practitioner, she can expense her cell phone (personal and business use), any costs surrounding her personal car (maintenance, gas, insurance), and any meals she has with friends. She keeps the receipts of their meals and would like to claim the entire amount as a business expense to reduce her own tax exposure. Any inventory she purchases will be recorded as an expense on her income statement to further reduce any tax exposure. Please advise Sky of why accurate tax reporting is important in Canada and about any misconceptions she currently has. She would also like to know what type of tax return she would have to file as a sole proprietor without an incorporated business and Canadian/Provincial business number.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Technical & Ethical Issues with Tax
Sky recently spoke to her father who is an experienced businessman because she isn’t sure about her
revenues and costs for the past year. Her dad vehemently stressed the importance of a sole proprietor
maintaining accurate records for business and tax purposes. Sky had grown impatient with the
conversation and ended it but is now curious about what her father may have meant. In Sky’s opinion,
as a sole practitioner, she can expense her cell phone (personal and business use), any costs surrounding
her personal car (maintenance, gas, insurance), and any meals she has with friends. She keeps the
receipts of their meals and would like to claim the entire amount as a business expense to reduce her
own tax exposure. Any inventory she purchases will be recorded as an expense on her income
statement to further reduce any tax exposure. Please advise Sky of why accurate tax reporting is
important in Canada and about any misconceptions she currently has. She would also like to know what
type of tax return she would have to file as a sole proprietor without an incorporated business and
Canadian/Provincial business number.
Investment Analysis & Accounting Treatment for New Asset
Sky is also considering acquiring a piece of machinery that helps her print designs on new or used
skateboards, regardless of which business plan she ends up selecting to move forward with. Please treat
this acquisition separate from any other analysis you prepare for income projections; it should not be
included in any projections you put together. Below, you’ll find the details of this purchase:
Initial Investment $75,000
Estimated useful life 12 years
Salvage Value $3,000
Estimated Annual Cash Flows
Increased
Operating and Maintenance Costs ($2,000)
Reduction in Manual Labour $3,000
Net Annual Cash Flow $8,000
If she were to acquire this asset, she would have to take out a $75,000 loan for which 5% interest on
principal only will be charged annually.
She is wondering the following:
• Is this a good investment and why or why not? Please discuss quantitative and qualitative
factors to consider.
• She heard the term ‘pay-back period’, what does this mean and what would be considered a
‘good’ payback period for her?
• What accounting entries (Debits and Credits) might she have to book upon purchasing the
asset?
• What accounting entries (Debits and Credits) might she have to book after a full year of using
the asset, assuming she elects to use the
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