Morton Forms
Morton Forms is a Canadian controlled private corporation owned by Viola Morton. For the
taxation year ended December 31, 2016, Ms. Morton’s daughter, Linda, who works in the
business, has calculated a Net Income for Morton Forms of $576,183. In calculating this figure,
Linda used generally accepted accounting principles.
Linda has produced the following Income Statement for the year ended December 31, 2016:
Morton Forms Inc.
Income Statement Year ending December 31, 2016
Sales $ 7,578,903
Cost of Goods Sold 5,468,752
Gross Profit 2,110,151
Expenses
General and Admin $ 852,000
Amortization Expense 550,000
Interest 8,500 1,410,500
Operating Income 699,651
Other Income:
Loss on Disposal of Intangible Assets (17,000)
Interest Income 110,532
Income before income taxes 793,183
Income Taxes
Current 182,000
Future 35,000 217,000
Net Income $ 576,183
During your review of Linda’s work and last year’s tax return for the corporation, you have made
the following notes:
1. In the accounting records, the Allowance for Doubtful Accounts was $25,000 at
December 31, 2016, and $20,000 at December 31, 2105. During 2016, the company
had actual write-offs of $11,750. As a result, the accounting Bad Debt Expense was
$16,750. This amount is included in General and Admin expenses on the Income
statement.
2. A review of the listing of receivables (for tax purposes), indicates that the actual items
that may be uncollectible total $15,000 at December 31, 2106. In 2015, the company
deducted a reserve for bad debits of $13,000 for tax purposes.
3. General and Admin Expenses include:
a) Donations to registered charities 27,000
b) Accrued Bonuses – Accrued Sept 1, 2016. Paid June 15, 2017 78,000
Meals and entertainment costs:
c) $1,000 per month for premium membership at golf club for Viola 12,000
d) $200 per month for membership at golf club for salespeople 2,400
e) Meals while entertaining clients 32,000
f) Food costs for Viola’s personal chef for her meals at home 5,000
g) Annual summer BBQ for all staff 6,000
h) Sponsorship of local baseball team where company name is
prominently displayed on front of jersey 15,000
i) Advertising in a US trade magazine directed at US clients 100,000
j) New software purchased October 1, 2016. ($13,000 for applications
and $25,000 for systems) 38,000
k) Accounting and legal fees for amended to the articles of
incorporation 6,000
l) Costs to attend annual convention of finger knitters in Thailand.
While at the convention, Viola was sure to hand out business cards
and talk to other attendees about her business with the intention of
claiming the convention as a business expense. 17,000
4. Interest expense consists of the following:
a) Interest expense – operations 5,000
b) Penalty and interest for late and insufficient instalment payments 2,000
c) Interest on late payment of municipal property taxes 1,500
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