Reference no: EM132459699

Question problems:-It is January 6, 2020. You, as an accounting major & future CPA has just met with Riley Whyte, the CFO of Jump To It Inc. (JTI). Your tax consulting firm will be preparing JTI's corporate tax return this year. Riley provided you with financial statements and other information needed to prepare the return (Appendix).

1. Write a memo to Riley regarding the gain on the sale of the land. Provide an analysis of how it should be treated for tax purposes. (Your memo should not exceed one page

Appendix
Jump To It Inc. - Tax information
Extracts from income statement
For the year ended December 31
(in $¹000s)

Sales Cost of Soles, (excluding depreciation)	2019	2018
	$                    19,643 13,755	$ 15,470 10,904
Gross Profit	5,888	4,566
Operating Expenses:
Selling and general operating	3,896	2,936
General and administrative	337	300
Depreciation and amortization	232	181
	4,465	3,417
Operating Income	1,423	1,149
Other Income
Interest and other income	237	118
Interest and other expenses	(125)	(72)
Earnings before taxes	1,535	1,195
Income taxes expense (recovery)	344	259
Net income	1,191	936
Retained earnings, beginning of year	2,615	1,829
Net income	1,191	936
Dividends	(150)	(150)
Retained earnings, end of year	3,656	2,615

lump To It Inc. - Extracts from balance sheet for As at December Assets Current: Cosh and cash equivalents Short-term investments Investment In Kids Place inc. Receivables Merchandise Inventory	lin $'000s) Tax information statement of financial position) 31 2019                                                    2018
	37 89 350 468 3,187	21 100 327 424 2,180
	4,131	3,052
Property, plant and equipment (net)	4,812	4,629
	8,903	7,681
Current:
Bonk indebtedness	25	324
Accounts payable and accruals	462	362
Deferred revenue	65	195
Income :ores payable	211	189
	763	£070
Long term debt	1,247	720
Otter habilitles	177	176
	2,187	£966
Amelia Wen' equity
Shore capital	3,100	3,100
Retained earnings	3,656	2.615
	8,943	$    7,681

Additional Information

The follow:1g were included in selling, general, and administrative expenses:

Charitable donations	$           3,000
Reserve for potential merchandise theft	7,500
Season tickets to the local Junior hockey team used for business	2,030
Staff Christmas party	4,500
Green fees for golf games with customers	4,003
Dinners attended with customers	3,250

2. The following were included in interest and other income:

• Taxable Canadian dividends of $10,000 from public corporations.
• Interest income includes $9,800 on an investment in bonds and $1,200 from overdue trade accounts receivable.
• Temporary investments were sold for $53,500, resulting in a gain on sale of $14,000 based on the difference between the selling price of the investments and the net book value of those investments of $39,500. The investments originally cost $29,400.
• There was an unrealized holding gain on temporary investments of $8,200.
• A government grant of $96,400 to assist with the cost of purchasing the new manufacturing facility (see "capital assets" below) was recognized in other income.

3. The following were included in interest and other expenses:

• There were brokerage fees of $2,000 on the sale of temporary investments noted above.
• $850 of interest was paid to the Canada Revenue Agency (CRA) for the late payment of taxes.
•  $50 was paid to CRA for penalties for late filing payroll • Legal fees of $2,500 were incurred to negotiate the terms of a debenture to finance the acquisition of the new manufacturing building (information provided below).

4. Capital assets: The undepreciated capital cost of the assets owned by JTI as January 1, 2019, was as follows :

Class 1 (Note 1 $302,000 Class 8 other 90,400 Class 10 (Note 2) 194,300 Class 53 220,500

Note 1 The Class 1 building and associated land were sold in the year for proceeds of $620,000. The net book value of the land and building was $590,000, and the accounting gain is included in other income. Sixty percent of the selling price was allocated to the land, and the remainder is attributable to the building. The original cost of the building was $370,000, and the original cost of the land was $350,000. Prior to the acquisition of a new manufacturing facility, this was the only Class 1 building owned by Irk
During the year, JTI paid $1,240,000 to acquire a new property that is used 92% of the time for manufacturing purposes. The cost allocated to the building was $794,000, and the remainder of the cost was allocated to the land.
Note 2 During the year, .ITI traded in an old delivery truck. A new delivery truck was acquired for $34,500 net of a trade-in value of $9,800 for the old delivery truck. No gain or loss was reported on the disposal of the old delivery truck because the trade-in value was equal to the net book value.

5. Other capital asset purchases and disposals:

• In 2018,1TI purchased a piece of land for $326,000 in order to build a new manufacturing facility on the land. At the time the land was purchased, it was not zoned for industrial use, but 1TI was quite confident it could apply for and obtain rezoning. If 1TI was unable to obtain rezoning, it was sure it could sell the land for more than it paid for the land. While El waited for rezoning approval, the land was used as a temporary parking lot. Income earned and interest and property taxes incurred were as follows during 2018 and 2019 (prior to the sale of the land):

Year Income Interest & Property Taxes 2018 $ 4,500 $6,200 2019 $ 2,400 $3,600
Despite repeated attempts, JTI was unsuccessful in obtaining the required rezoning. In 2019, JTI listed the land with a realtor and sold it for $396,500. An unlimited patent was purchased for $47,500 in 2019. 6. Other information: Additional information from the 2018 tax return is as follows: 

• Refundable dividend tax on hand $16,000
• Dividend refund received relating to prior year 11,973
• CDA balance
• Eligible dividends were paid in 2018
• Net capital loss carryforward from 1999 - $ 3,000
• Carryforward capital loss from June 2000 $1,000 For the year ended December 31, 2019, JTI was associated with another company (not KPI), and $100,000 of the business limit has been allocated to that company. On December 31, 2019, JTI declared and paid a dividend of $150,000 to shareholders.