WKL LtdIs a Canadian-Controlled Private Corporation Operating a Small Land-Development Business

question 5

Essay

WKL Ltd.is a Canadian-controlled private corporation operating a small land-development business.In June 2020, the company acquired a license to manufacture pre-fab homes and began operations immediately.Financial information for the 2020 taxation year is outlined below:
WKL's profit before income taxes for the year ended November 30, 2020, was $245,000, as follows:
$\begin{array}{|l|r|}\hline \begin{array}{l}\text { Income from land development and pre- } \\\text { fab home manufacturing }\end{array} & \$ 248,000 \\\hline \text { Loss of sale of properties } & (3,000) \\\hline & \$ 245,000 \\\hline\end{array}$
The loss on sale of property resulted from two transactions.On October 1, 2020, WKL sold all of its shares of Q Ltd., a 100% subsidiary, for $100,000.(The shares were acquired seven years ago for $80,000.) Also, during the year, WKL sold some of its vehicles for $25,000.The vehicles originally cost $50,000 and had a book value of $48,000 at the time of sale.New vehicles were obtained under a lease arrangement.
The 2019 corporate tax return shows the following ending UCC balances:
$\begin{array}{|l|r|}\hline {\text { Undepreciated capital cost: }} & \\\hline \text { Class } 8 & \$ 30,000 \\\hline \text { Class } 10 & 120,000 \\\hline \text { Class 13 } & 45,000 \\\hline \text { Class 14.1 } & 2,100 \\\hline\end{array}$
WKL occupies leased premises under a seven-year lease agreement that began three years ago.At the time, WKL spent $60,000 to improve the premises.The lease agreement gives WKL the option to renew the lease for two three-year periods.WKL began manufacturing pre-fab homes on June 1, 2020.At that time, it acquired the following:
$\begin{array}{|l|r|}\hline \text { License: right to manufacture for 10 years } & \$ 90,000 \\\hline \text { Manufacturing equipment (Class 53) } & 105,000 \\\hline \text { Trucks (Class 10) } & 60,000 \\\hline\end{array}$
Accounting amortization in 2020 amounted to $60,000.
WKL normally acquires raw land, which it then develops into building lots for resale to individuals or housing contractors.In 2020, it sold part of its undeveloped land inventory to another developer for $400,000.The sale realized a profit of $80,000, which is included in the land-development income above.The proceeds consisted of $40,000 in cash, with the balance payable in five annual instalments beginning in 2021.
Travel and entertainment expense includes the following:
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Professional hockey tickets for suppliers } \\\text { and staff }\end{array} & \$ 7,000 \\\hline \text { Hotel and airfare } & 9,000 \\\hline \text { Charitable donations } & 4,000 \\\hline\end{array}$ Legal and accounting expense includes the following:
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Revising the corporation's articles of } \\\text { association to conduct business in all } \\\text { provinces }\end{array} & \$ 2,000 \\\hline \text { Collection of bad debts } & 1,500 \\\hline \text { Reviewing the terms of a collateral } & 3,000 \\\text { agreement on a long-term bank loan } & \\\hline \text { Annual audit } & 8,000 \\\hline \text { Golf dues } & 2,000\\\hline\end{array}$
Required:
A) Calculate WKL's net income for tax purposes for the 2020 taxation year.
B) Explain why the $3,000 accounting loss on the sale of properties differs from any tax gains/losses from part A.Prepare a journal entry in your answer.
(Adapted from "Problem Eleven" from Chapter Six of previous editions of the textbook)

• A) Calculate WKL's net income for tax purposes for the 2020 taxation year.
• B) Explain why the $3,000 accounting loss on the sale of properties differs from any tax gains/losses from part A.Prepare a journal entry in your answer.
• (Adapted from "Problem Eleven" from Chapter Six of previous editions of the textbook)

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