Question

The following information relates to Honest Frank Inc. (HFI) December 31, 2019 , the first year of operations :

1. Accounting income before tax is $2,000,000.
2. Accounting depreciation in the books is $300,000 and CCA tax depreciation claimed was $420,000.
3. HFI sells state of the art Cadgets with a 2-year warranty. The estimated warranty cost is $50 per unit. During 2019, the company sold 9,000 units of the product and paid out $200,000 in warranty costs.
4. The accounting income before tax included $90,000 in entertainment expenses, of which only 50% can be deducted for income tax purposes.

Required: Reconcile accounting income before tax to taxable income for 2019

Answer 1

	Reconciliation of Accounting Income & Taxable Income
		Amount in $
	Accounting income before tax	2,000,000
	Add: Book Depreciation	300,000
	Less: CCA Tax depreciation	420,000
	Add: Warranty provision ( 9,000 x 50 )	450,000
	Less: Warranty cost paid	200,000
	Add: Disallowed entertainment expense	45,000
	(90,000 x 50% )
	Taxable Income for 2019	2,175,000