Well, Tony sure has appreciated all your help with his various accounting concerns! In fact, he has really come to rely on your advice and expertise. As you know, he gets nervous about making mistakes. He feels very fortunate to have found Better and Best and that you were assigned to his account. It is now May 2021, and the books are finally closed for the year ended Feb 28, 2021.
Tony is very excited to tell you that his recent HST audit was a complete success. The audit finished quickly and not a single error was found. He attributes that to all the help you have given him. Unfortunately, his friends, Leo, at Herkimer’s Home Supplies was not quite so lucky. An error was found in his recent audit. Herkimer’s had purchased equipment on May 1, 2020 at an HST inclusive price of $22,600. The proper amount of HST has been claimed, however the rest cost of the equipment had been expensed. Herkimer’s normal policy is to record a full year of depreciation in the year of acquisition using the straight-line method over six years with 10% residual value. The company has a 25% tax rate. Leo told Tony that he doesn’t think he needs to record a journal entry because Herkimer’s year ended Dec 31, 2020 is now closed, but he asked if you could give some advice. Tony mentioned that Herkimer’s might even like to become one of your regular clients.
Speaking of advice, Tony wonders if you could help him complete Handel’s income tax calculations for the year ended Feb 28, 2021. He has given you the financial statements, which showed operating income before tax of $527,000. You are aware that Handel’s uses the future income tax method. Most of Handel’s revenues and expenses were fully deductible for both accounting and tax, however there were some items that require further analysis.
On Mar 1, 2020, Handel’s had taxable temporary differences of $15,000 and a future income tax liability of $4,500. Property, plant and equipment had a carry value of $175,000 and a tax basis of $160,000. On Feb 28, 2021, the carrying value for these assets was $150,000 and the tax basis was $130,000. There were no asset acquisition or disposals during the year.
In 2018, Handel’s has invested in the shares of Brighton Inc., a toy manufacturer that is a Canadian taxable corporation. In Sep 2020, Handel’s received dividend revenue of $3,000 from Brighton. On Feb 28, 2021, an unrealized loss of $2,000 was recorded for these shares.
Handel’s paid $8,000 for a golf membership for Tony to the Rock Solid Gold Club, where he often meets customers for a fun round of golf.
A $150 spending ticket was paid by Handel’s. OOPS! Tony was in a big rush to get to a Toy Convention in Toronto, but would have actually gotten there quicker if he had not been pulled over and given a ticket.
On Feb 1, 2021, Handel’s prepaid $1,000 as a deposit on a $50,000 order of a new line of Disney themed puzzles called “Pandemic Puzzles”. Tony expects these puzzles to be big sellers over the 2021 summer. The manufacturer required a deposit in order to lock in the purchase price of $10 per puzzle. Because the deposit is for a future purchase, Tony recorded the following journal entry.
Dr Derivatives 1,000
Cr Cash 1,000