FMT9 Problem: Taxable Income - Jermat Ltd.

FMT9 Problem: Taxable Income - Jermat Ltd.

Jermat Ltd. (“Jermat”) is a Canadian Controlled Private Corporation carrying on business in Canada.

Jermat is 100% owed and operated by Mr. Jermat. Jermat’s income statement for the year ended

December 31, 2005 is as follows:

Jermat Ltd.

Income Statement

For the Year Ended December 31, 2005

Sales $3,000,000

Cost of goods sold 800,000

Gross profit 2,200,000

Salaries 350,000

Amortization 200,000

Other selling and administrative expenses 650,000

Operating income 1,000,000

Other income and expenses 56,000

Income before income taxes $944,000

The following additional information is available:

1. The company uses LIFO for valuation of inventory for accounting purposes. Inventory

values under LIFO and FIFO were as follows:

LIFO FIFO

January 1, 2005 $235,000 $250,000

December 31, 2005 $260,000 $280,000

2. Salaries expense includes $50,000 for management bonuses. The bonus will be paid in

two equal installments on January 15 and June 15, 2006.

3. “Other Selling and administrative expenses” include:

a. $12,100 paid for damages for breach of contract.

b. $10,200 related to landscaping the administrative office premises. The expected life

of the landscaping is 12 years.

c. $9,500 with regards to the theft by one of the employees.

d. $12,000 in respect of the president’s golf club membership. The president uses the

facility to entertain prospective clients. $4,000 of the $12,000 was for meals in the

club dining room.

e. $3,000 for baseball tickets to entertain clients.

f. $4,000 in respect of bond premium amortization.

g. appraisal fees on assets for sale in the amount of $2,500.

h. registered charitable contributions of $38,000, Federal political donations of $3,000

and Provincial political donations of $2,000.