Jaylen Abbas runs a small proprietorship.You have been provided with the following financial information pertaining to his business:
$\begin{array}{|l|r|}
\hline \text { Sales } & \$ 150,000 \
\hline \text { Cost of goods sold* } & 80,000 \
\hline \text { Advertising in a local paper } & 1,000 \
\hline \text { Advertising in a U.S. newspaper directed } & 2,000\\text { at Canadians living in the U.S. }\\hline \text { Meals and entertainment } & 10,000 \
\hline \text { Property taxes on a vacant piece of land } & 2,500 \
\text { (which earns no income) adjacent to the } & \
\text { business } & \\hline \text { Golf course fees for Jaylen } & 1,500 \
\hline \text { Cost of one convention held on a cruise } & 2,000 \
\text { ship in the Mediterranean Sea sponsored } & \
\text { by a Canadian fishing association. } &\
\hline
\end{array}$
(All closing inventory is valued at market value.)
Required:
A) Calculate the net income for tax purposes for Jaylen's proprietorship.
B) Explain why any items have been omitted.
C) Briefly discuss how your answer in A) would change if Jaylen had valued the inventory at cost.

Question

Jaylen Abbas runs a small proprietorship.You have been provided with the following financial information pertaining to his business:
 $\begin{array}{|l|r|}
\hline \text { Sales } & \$ 150,000 \
\hline \text { Cost of goods sold* } & 80,000 \
\hline \text { Advertising in a local paper } & 1,000 \
\hline \text { Advertising in a U.S. newspaper directed } & 2,000\\text { at Canadians living in the U.S. }\\hline \text { Meals and entertainment } & 10,000 \
\hline \text { Property taxes on a vacant piece of land } & 2,500 \
\text { (which earns no income) adjacent to the } & \
\text { business } & \\hline \text { Golf course fees for Jaylen } & 1,500 \
\hline \text { Cost of one convention held on a cruise } & 2,000 \
\text { ship in the Mediterranean Sea sponsored } & \
\text { by a Canadian fishing association. } &\
\hline
\end{array}$
(All closing inventory is valued at market value.)
Required:
A) Calculate the net income for tax purposes for Jaylen's proprietorship.
B) Explain why any items have been omitted.
C) Briefly discuss how your answer in A) would change if Jaylen had valued the inventory at cost.

Quizplus · Accepted Answer

The Answer is A)

\begin{array}{|l|r|}\hline ext { Revenue } & \$ 150,000 \\hline ext { Cost of goods sold } & -80,000 \\hline ext { Advertising } & -1,000 \\hline ext { Meals and entertainment } & -5,000 \\hline ext { Net income for tax purposes } & \$ 64,000\\hline\end{array}

B) Omitted items:
Advertising in an American newspaper is not deductible when the targeted market is Canadian. S.19
Half of the meals and entertainment are not deductible. S 67.1
Property taxes on vacant land is only deductible to the extent that income is earned. S.18(2), (3) The amount can be added to the cost base of the land.
Recreational fees are not permitted as deductions. S.18(1)(l)
The convention is not within the territorial scope of the organization hosting the conference, therefore, it is not an allowable deduction. S.20(10)

C) The Income Tax Act requires that closing inventories be valued at either:
1) the lower of cost or market value of each item, or
2) the market value of all items of inventory.
Jaylen would need to value the inventory as per these provisions, which could affect both cost of goods sold and net income for tax purpose

Jaylen Abbas Runs a Small Proprietorship (All Closing Inventory Is Valued at Market Value