Question

sam runs a proprietorship that generated $75,000 in profits in 20x0. included in these profits are: a) $10,000 - amortization expense; b) $5,000 - reasonable bad debt expense; c) $55,000 - cost of goods sold (closing inventory at market value); and $8,000 - meals and entertainment with clients. sam's capital cost allowance has been accurately calculated at $8,500 for the year. how much is sam's business net income for tax purposes? question 13select one: a. $80,500 b. $73,500 c. $75,000 d. $89,000

Answer 1

Sam's business net income for tax purposes is calculated by making adjustments to the reported profits of $75,000. After adding back the non-cash amortization expense, subtracting the capital cost allowance, and adding back half of the meals and entertainment expenses, the net income for tax purposes amounts to $80,500.

Step-by-step explanation:

The question asks us to calculate the net income for tax purposes for Sam's business. Starting with the profits of $75,000, we need to adjust for certain expenses and allowances to find the net taxable income. According to tax regulations, amortization expenses are non-cash expenses and therefore would be added back to the profits. However, the capital cost allowance, which is a depreciation expense for tax purposes, is deductible. The reasonable bad debt expense of $5,000 is also typically deductible as it is an expense occurred in earning the income. Meals and entertainment expenses are usually only partially deductible, assuming a 50% deductibility, $4,000 would be added back to the profits.

Here's the calculation:

Initial profits: $75,000

Add: Amortization expense: $10,000

Subtract: Capital cost allowance: $8,500

Add: 50% of meals and entertainment: $4,000

Sums up to a net income of: $75,000 + $10,000 - $8,500 + $4,000 = $80,500.

Therefore, the answer is (a) $80,500.