Business Taxation in Canada: Analysis of Eldridge Asset Sales Inc. Financial Statements

Running head: BUSINESS TAXATION IN CANADA 1
Topic: Business Taxation in Canada
By (Name of Student)
(Institutional Affiliation)
(Course Code)
(Date of Submission)

BUSINESS TAXATION IN CANADA 2
The following information is taken from the financial statements and audit working papers of Eldridge
Asset Sales Inc. ("EASI") for its fiscal year ended December 31, 2018.
Eldridge Asset Sales Inc.
Condensed Unaudited Income Statement
For the Year Ended December 31, 2013
Sales $16,650,000
Cost of goods sold (14,050,000)
Gross profit $ 2,600,000
Selling expenses $975,000
General and administrative expenses 195,000 (1,170,000)
Net income before provision for income taxes $ 1,430,000
Provision for income taxes — current $220,000
— future 310,000 (530,000)
Net income after tax $ 900,000
Net income for accounting purposes: $900,000
Add back tax expenses: $530,000
TOTALS $1430,000
The following items were deducted in arriving at the above net income:

BUSINESS TAXATION IN CANADA 3
1. Included in sales for the year is a deposit of $28,200 received from a customer for goods
that will be delivered next year
Reason/process
20 (1)(m), deferred revenue is allowed, TAX = GAAP
NIL
2. During the year, a warehouse worker managed to remove valuable inventory worth $18,000
during the night shift by taking it out in his lunch box.
Reason/process
Pass three tests, deductible
NIL
3. Late in the year, it became apparent that during the next year new competitive products
would come on the market which would drive the price of their products down. They expect
this decline to take place in about six months. As a result, they decided to set up a reserve
for a decline in the inventory value in the amount of $23,000. They have never set up this
kind of reserve before.
Reason/process
Does not meet LCM, reverse accounting treatment
+$23,000

BUSINESS TAXATION IN CANADA 4
4. Because their products come back for repair under their warranty program, they set up a
reserve for this expense on their financial statements. Last year the reserve was $56,000.
This year they decreased the reserve to $44,000. The warranty was not insured. The actual
cost was $5,000.
Reason/process
Not extended warranty, not deductible
+$56,000
5. Charitable donations were made in the amount of $12,000. The company expensed the
donations as promotional expense.
Reason/process
Donation was not for the business, thus not deductible
+$12,000
6. Golf club membership fees in the amount of $16,000 were paid for the sales manager who
used the club regularly to close sales. The sales manager incurred expenses related to meals
and entertainment at the golf club in the amount of $12,300.
Reason/process
Membership fee in golf club; not deductible
+$16,000
Also, for the sales manager,
Not business related, not deductible
+$12,300