Securitized Donations

[Griet van Vliet]

"Finally, the payout for Drexel has arrived" Griet told Leastre after returning from this sortie in the Silken Asteroids.

"I apologize, I wasn't there on Drexel, but what happened on Drexel?"

"It was about fighting pirates in orbit over Drexel; they were using signal jammers that caused passing ships' reactors to malfunction"

Sometimes it seemed to take forever to distribute the seized assets of pirates, be it PP&E that wasn't destroyed by or other financial assets; typically they would attempt to pay off the bills of the pirates and to repay the other debts they may have accrued. In that sense it was much like a corporate liquidation, with debtors being paid first, despite the criminal nature of their revenues, and then any stakeholders in their capture being paid afterward. Griet examined the letter from the Drexel authorities, and they list the donations made to all 11 surviving pilots of her squadron in this operation. And there were mostly... securities, with their associated promissory notes. Most of the actual cash reserves of the pirates were used to pay off debts, and they had no accounts receivable, with most of the debts being accounts payable and other current liabilities. I know by now Janick has had the exact same amount in securities as I did, they tried to fairly apportion the securities among the 11 pilots and all other participants, and now I'm going to need to keep track of not only the royalties revenues from the Asobi 95% tihaar, and my share of the revenues from the Utai Magic Circle, but also the revenues from the accounting firm and these securities, she thought, before plunging into the next client's file.

 

[Griet van Vliet]

That client's file was not looking good: Rif Dimashq's biggest debt item was a 2-million, 12% note payable, and, under the arrangements made with creditors, the Springwell Bank accepted to lower the principal to 1.6 million, to extend the maturity date by three years and to lower interest rate to 10%. Typically tax files are much happier than debt restructuring, Griet thought, while wondering whether the gain on restructuring of debt will be taxable on Rif Dimashq's books. And maybe even force it to enter a higher bracket unless there are other losses incurred. The one thing that is known is that the market rate is 10% in the client's market so the journal entries are: Dr. Note Payable 2,000,000, Cr. Note Payable 1,600,000 Cr. Gain on restructuring of debt 400,000. However, out of curiosity, she decides to do the journal entry for the Springwell Bank (although not requested by the client): Dr. Modification Loss, 476,859, Dr. Notes Receivable 1,523,141, Cr. Notes Receivable 2,000,000. And the income tax expense on the client's gain on restructuring of debt would be rather straightforward, assuming it was taxable: Dr. Income tax expense 140,000, Cr. Income tax payable 140,000.

 

[Griet van Vliet]

The happier portion of Rif Dimashq's file has nothing to do with the restructuring of debt, but with consignment sales, unearned revenues and standard warranties. Rif Dimashq is in the business of manufacturing specialty mowers, of which 300 are sold directly at an average cost of 850 credits each, with a one-year warranty that comes as a default, and a separate three-year extended warranty for 90 credits, so the rest of the mowers they make are sold on consignment. So Rif Dimashq is, in fact, a consignor that, unlike most companies, had allowances for doubtful accounts and recognize bad debt expenses. And also had the consignees handle warranties, with the 15 credits/unit for part and 10 credits/unit for labor applicable to either case. In the meantime, 40 credits/unit for parts and 20 credits/unit for the labor were applied in the extended warranty case. At this point, Griet decided to start with the direct sales: Dr. Cash 279,300, Cr. Sales revenue 255,000, Cr. Unearned warranty revenue 24,300, Dr. Warranty expense 23,700, Cr. Warranty liability - parts 15,300, Cr. Warranty liability - labor 8,200.

 

[Griet van Vliet]

Now for the consignment sales: these were the ones with the AFDAs and bad debt expenses. During the year, consignment sales amounted to 730 units, again at 850 credits/unit on average. Why is it that they are failing to generate sufficient revenues, embezzlement? Were their consignees being undercut? I ought to dig a little deeper, but my guess is that, if the consignees were undercut, it's because most of their consignees were in GA-land, she thought. These units cost 600 credits/unit to manufacture, and the entry is Dr. Inventory on consignment 438,000, Cr. Finished goods inventory 438,000. Now the question is: the freight expenses. Dr. Inventory on consignment 12,000, Cr. Cash 12,000. So in Griet's view, the accounts receivable would be for 620,500. And then any calculations for AFDA, whose beginning balance was 8,200, would begin in earnest, and the ending balance was 12,410; they decided to increase to 2%. Yet the horror would come soon: write-offs amounted to 68,000 credits... so the bad debt expenses are a whopping 72,210 credits. Not to mention the other expenses of 98,290, most of which are consignees' commissions - they had no credits left to cover the remaining expenses, after deducting the COGS of 450,000 credits. They received cash for only 650 units by Griet's count.

 

[Griet van Vliet]

So the rest of this file is in the hands of Norinchukin? Better remit the information I produced on Rif Dimashq to him, then again, I have the heaviest portions of the accounting files that others feed to the firm, she thought, while she remitted the progress made on this file in exchange for another accounting file. This time around, it is about an operation for mining tanium in the Silken Asteroids. A mining outpost was built by Damanhour for a carrying value of 5.46 million and expected to last six years until the tanium in that asteroid is exhausted. At the end of the six years, Damanhour is required to dismantle the platform and the estimated cost of dismantling it is 950,000 credits. A classic asset retirement obligation case. They estimated 70% of that cost is caused by the asset itself, and the remaining 30% to the actual mining of the tanium. Also, they expect the ARO to be discounted at a rate of 8% compounded yearly. So this year's contribution to the ARO that comes from the tanium being mined is 32,328 credits, apparently. Finally, the depreciation is to be, for financial reporting purposes, is recognized as straight-line without any residual value.

 

[Griet van Vliet]

Present value calculations: most Jedi she knew hated them, and may even be unable to perform them, but even in Republican service, Griet was characterized with having a lot of mathematical talent. It was time for Griet to get to work: 8%, six interest payments (at year-end), and then 70% of that amount, which amount to 598,662*0.7 = 419,063. Correspondingly, this year's ARO "interest" expense is then 33,525 and hence the journal entries are: Dr. Mining outpost 419,063, Dr. Inventory 32,328, Dr. Interest expense - ARO 33,525, Cr. ARO liability 484,916. The depreciable value is then 5.46 million + 419,063 = 5,879,063 and the depreciation entry is: Dr. Depreciation Expense 979,843, Cr. Accumulated Depreciation 979,843. Phew, wasn't that hard, was it? she thought, while examining the securities that were donated to her. Looks like one of the most intriguing securities she received as a donation was a set of futures for 240 shares of Damanhour, due to be delivered and she also inherited the margin the pirates posted on these futures, that is, 480 credits.

 

[Griet van Vliet]

Not only that, the pirates also bought the futures proper for 480 credits. So, in the pirates' ledger, the first entry, the only one that dated from before their defeat, is the following: Dr. Deposits 480, Dr. Derivatives 480, Cr. Cash 960. At the end of the third quarter, the entry would then become Dr. Derivatives 1300, Cr. Unrealized gain 1,300 (based on the futures being worth 1,780 credits). and Dr. Unrealized loss 815, Cr. Derivatives 815 at year-end since the futures were worth 965 credits then. Relax: Janick told me everything I know about the investment aspect of futures, but accounting for them is a little different. I could always settle them net right now, in which case I'll be making 1,680, of which 1,200 is subject to the capital gains taxes, and make a gain of 235 compared to year-end, she thought, while realizing the strike price the pirates bought it for was 80 credits/share, and it currently traded for 85. Clearly the futures were "in the money" and hence getting the securities delivered for 19,200 credits was a realistic possibility; if Griet did that, however, she would need to put in an outlay for 19,200 credits. For those equity securities.

 

[Griet van Vliet]

"Griet, looks like Damanhour just enacted a 2-for-1 stock split" Leastre warned Griet.

"Poodoo: now I'll be finding myself with 480 shares of that company since I'll take delivery of them; futures still outstanding are affected by this split"

Now, for some reason she was also given convertible bonds from the pirates' estates that originally converted bonds into 5 common shares, now it's 10 common shares. Since the pirates were the ones that made the outlay for those debt securities, Griet was the one making the money off of it and hence these pirates are incurring capital losses. And now for the more interesting portion: to pay for the outpost (and a bunch of other stuff related to financing the operations in the Silken Asteroids) Damanhour issued, at the beginning of last year, 10 million credits in 8% convertible debentures due in 20 years. The present value was estimated, at the beginning, to be 8.5 million and the rest of the proceeds, 2.3 million, were attributed to a contributed surplus. I guess this is where my financial calculator is useful, she thought, while the effective yield was 9.73% and, by the effective-interest method, Damanhour was paying 800,000 credits in cash, and 27,005 credits in amortization; the entry was then Dr. Interest Expense 827,005, Cr. Cash 800,000, Cr. Bonds payable 27,005. The unamortized discount balance was then 1,472,995.

 

[Griet van Vliet]

The pirates made a capital outlay of 54,000 credits to buy the debt securities; since the bonds were given to her after the first payment was due, this meant Griet missed out on the first interest payment of 4,000. This is getting weirder and grosser. Now, if I decide to cash in on this opportunity, I will have the proceeds to invest in other securities, regardless of whether they are debt or equity. I would so love to invest in another company's stocks, she thought, while realizing that another financial decision was made by Damanhour, simultaneously to the 2-for-1 stock split: to save themselves part of the trouble with interest, they announced that they would retire 30% of the bonds. They estimated the cost of retiring the bonds at 3.306 million and the cost of that bond (on its own) as 870 credits apiece, so journalizing this transaction was key: Dr. Bonds payable 2,558,101, Dr. Contributed surplus 690,000, Dr. Loss on bond retirement 51,899, Dr. Retained earnings 6,000, Cr. Cash 3,306,000. So she would have 55,100 credits as to the proceeds; for tax purposes, she was deemed to have acquired the bonds for 54,000 (even though she actually paid nothing out-of-pocket), and only made a 1,100-credit capital gain.

"I'll be taking this opportunity to cash out the Damanhour bonds"

 

[Griet van Vliet]

Is this the end of the donations-in-securities? Why was I given the most complex financial instruments? Why can't I have more simple securities, debt or equity? Assuming I did, in fact, take delivery of the securities, I'd still have credits to invest in different securities, she thought, while the following journal entry would be made then, and the margin would be applied towards the 480 shares being delivered at 40 credits/share (even though the actual price is 42.50/share after the 2-for-1 split) as the position is closed. The journal entry would then become Dr. FV-OCI investments 19,200, Cr. Deposits 480 Cr. Derivatives 1,550, Cr. Cash 17,170. So she had 37,930 credits left to invest in other securities, and her donation amounted to a total of 57,130 credits as of today. Compared to what landed on that padawan's Jedi Trials a week or so back, this couple's fiscal case is a lot simpler: the case is about the husband that was unemployed for two years, with unused RRSP contributions and then proceeded to get a job and also to gamble at Skor's Grand Casinoscam, and what advice to give that Talz taxpayer. Meanwhile, the wife operates a therapist practice.

 

[Griet van Vliet]

The husband that was imprisoned goes first in her mind. For the first year in prison, he had unused RRSP deduction room of 18,500 credits, while having undeducted contributions of 14,700 credits. With no income to offset it against in the first two carryback years, these went unused. When he was released, in his third and final carryback year, he had several periods of part-time employment and had Earned Income for RRSP purposes of 17,300 credits. Because Squib taxation excludes gambling revenues from personal taxes, he accumulated tax-free winnings of over 100,000 credits at the Grand Casinoscam; upon returning to Talz-land, he immediately made a 20,000-credit contribution to his RRSP. Without deducting any RRSP contributions that year, he has no Tax Payable that year either. During 2017, he finally finds full-time employment and earned 45,000 credits for RRSP purposes, making no contributions and claims the maximum RRSP deductions. That said, he also had 6,000 in withheld income taxes, 2,227.50 in SPP withholdings and 747 credits in EI contributions. The issue is to calculate what refund, if any, he is getting, and also what penalties he would be assessed for his RRSP excesses, if any.

 

[Griet van Vliet]

He had no Tax Payable the year of his release because he had carryforward terminal losses on his CCA claims, she thought, while making the RRSP calculations. The deduction room in the year of his release is 18,500 + 0.18*17,300 = 21,614, and up to this point he contributed 34,700 credits. He is then exposed to penalties of 1% per standard month for every credit over the limit, minus a 2,000 credit cushion. So, for this fiscal year, he is exposed to penalties on 34,700 - 21,614 - 2,000 = 11,086 and hence he has to pay 12% of that sum as a penalty, so 1,330.32 has to be reported on his income tax payable under "special taxes" for the year. But then again he is taxed on 45,000 - 21,614 = 23,386 as a result, so for next year he can only claim 8,100 in deductions so he ought to withdraw at least 2,986 credits from the RRSP and place it in the other tax-free investment vehicles available to Talz, depending on what he wants to do with the funds, the TFSA or the RESP (if he has kids that are not yet old enough to attend higher education). But the other amounts he has to pay are (23,386 - 11,635 - 2,227.50 - 747 - 1,178)*15% = 1,139.78 and then his income tax payable is 2,470.10, of which there was 6,000 withheld. So, even with the penalties being assessed, he's still getting a refund for 3,529.90. It's still as happy an ending as it could get.

 

[Griet van Vliet]

Now, the wife's stuff. An unincorporated therapist practice, taking up the entirety of a commercial building bought for 725,000 credits, with an UCC (undepreciated capital cost) of 447,831 credits (meaning that the practice has been around for years) and the land is worth 175,000 credits. Separate class 1 at 6% declining balance. The furniture was destroyed by a couple during the year, and hauled by the Jedi Praxeum for free. The old furniture had a capital cost of 53,000 credits and an UCC of 38,160. Now the new furniture cost her 78,000 credits. Also the two-year-old speeder, judged to be too luxurious for the clientele served, was also traded in for a much cheaper speeder, and traded in for 22,000 due to the damage level incurred. The old speeder's UCC was 17,850. And yet, for some bizarre reason, the Talz's tax authorities hate passenger speeders over 30,000 used for business purposes, and any such vehicle has to be placed on its own class 10.1, and also no recapture of CCA, nor terminal losses, could be recognized on those. But the new speeder was bought for 28,000 credits, and driven for 41,000 km and only 3,000 km for personal use and costing 6,150 credits to operate.

 

[Griet van Vliet]

Other asset acquisitions during the year were as follows: New computer 1,250, Applications software 1,475, Patient list from retiring therapist 32,000. Other expenses include, on an accrual basis the following: Building operating costs 27,300, Payments to assistants 46,100, Income tax withheld 6,200, SPP payments 2,281.95, EI payments 765.26, office costs 13,600, meals with clients 15,500. Gross billings are 297,800, and, although the gross VAT remittance is 14,890 credits, that sum is not to be declared on a tax return, and neither is a net remittance. Now, the client is also interested in the net remittance since the financial statements demand it. Oops. Forgot about the doggy: the dog WILL make the CCA stuff much more complicated, she thought. The therapy dog was paid in six installments of 950 credits each, the dog's food cost is 2,600 credits, its veterinary fees are 800 credits, the therapy dog training cost 1,400, the dog walking fees were 3,280, repairs to the building caused by the dog were 2,950, the paw protectors were for 140, the custom-made clothing for 820 and, finally, the dog crate is 400 credits.

 

[Griet van Vliet]

First step: determine which expenses are subject to VAT and which ones aren't. Because VAT, at a 5% rate, is recoverable, and all the expenses subjected to VAT were recorded VAT inclusive and, of that list, the only ones that aren't, are the payroll and the patient list. So, for the year, she spent a total of 161,365 credits on taxable stuff, on which she paid a total of 7,684.05 in VAT. Therefore the net remittance is 7,205.95. Now, assuming all the expenses are allowed, minus 50% of the meals with the patients, the expenses before CCA are 113,290 credits (the therapy dog is instead capitalized and not just for tax purposes, although animals, while clearly having a finite lifespan, cannot be depreciated for tax purposes, not even in that "catch-all" CCA Class 8). Now came the nightmare of CCA for the therapist: she was hard at work trying to produce a schedule for which assets go into which class, applying the half-year rule to each, at what rate to decline the UCC balances by class and, of course, whether or not there has been any recaptures of CCA or terminal losses:

• Class 1 (separate class at 6%): Beginning UCC: 447,831, Net acquisitions Nil, Depreciable balance 447,831, CCA 26,869.86, Ending balance 420,961.14
• Class 8 (20%) Beginning UCC 38,160, Net acquisitions 78,820, Depreciable balance 77,570, CCA 15,514, Ending balance 101,466
• Class 10 (30%) Beginning UCC Nil, Net acquisitions 28,000, Depreciable balance 14,000, CCA 4,200, Ending balance 23,800
• Class 12 (no half-year rule, 100%) Beginning UCC Nil, Net acquisitions and depreciable balance 2,015, CCA 2,015, Ending balance Nil
• Class 14.1 (5%) Beginning UCC Nil, Net acquisitions 32,000, Depreciable balance 16,000, CCA 800, Ending balance 31,200
• Class 50 (55%) Beginning UCC Nil, Net acquisitions 1,250, Depreciable balance 625, CCA 343.75, Ending balance 906.25
• Total CCA: 49,762.61
• Total expenses: 163,032.61

The total net business revenue and hence net income for tax purposes, as well as taxable income, is therefore 134,767.39. The tax liability would then be 16,300 + (134,767.39-91,831)*26% = 27,463.46 since there was no withholding whatsoever.

 

[Griet van Vliet]

Now I have 37,930 credits to allocate among other securities of other companies, hopefully not of clients, since I wanted to convert the debt securities those pirates held and use the amount to cash in on the stock-options from the futures I got from them, she thought. But now was not the time to get her investment portfolio in order; she had another client to deal with. Another couple (typically couples tended to hire the same accountant) had another pretty hefty tax file. Three children must also be filed: the youngest two had 1,000 credits in dividends from public companies and were given 9,500 credits' worth of shares that their parents originally bought for 8,000 credits each. This meant 1,630 in taxable income, because of the gross-up, but they would be unable to use any of the DTCs (6/11 of the gross-up of 380), and they had no income tax payable, and no refunds either, no more than they even had any balances due. Now, another file pertained to the eldest son, which is a lot more bizarre for her to deal with. And that's not the tuition: it's the sale of securities.

 

[Griet van Vliet]

Now, just because the parents pay for the tuition of 6,300 credits and 650 credits in textbooks, for 4 months of the year, in an off-world institution, doesn't mean it's the end of the story: there were two transactions made regarding another block of shares. The first transaction is made from father to son, and the block that was originally sold for 28,000 credits, were trading for 36,500 credits at the time of the sale, made for 5,000 credits to the eldest son. Second transaction: he sells that block of shares for 42,000 credits. Conclusion: he made a capital gain of 37,000 credits since the deemed disposition for non-arm's length parties selling below fair market value (but not for free) is that the ACB is for actual proceeds to the transferee, but the transferor is deemed as having sold the assets at FMV. Then the oldest son reports 18,500 credits in capital gains, and the father, 4,250. The cold, hard truth is that, since the eldest son's taxable income is higher than the sum of 11,635 credits and the eligible tuition (textbooks are not eligible for the tax credit), the whole credit room is eaten up. Hence his tax liability is on the final 565 credits, and his balance owing is hence 84.75.

 

[Griet van Vliet]

Three down, two more to go. The mother operates an unincorporated mail-order business out of furnished, rented space and hence does not possess capital assets. The net business income of that business is 70,544 credits. Having spent half a summer (6 weeks) attending an accelerated accounting course at a designated educational institution, and also 2,000 credits, she receives a tax receipt for her enrollment (a bit expensive to Griet's taste; her distance-learning MBA cost her about 400 credits/course). Plus, for some reason, the husband having gifted her a rental property last year was simply a tax-free spousal rollover. Originally purchased for 500,000 credits, of which 100k is for the land and 400k is for the building proper, that property had a FMV of 530k, 110k of which is for the land and 420k is for the building, while its UCC was 376,320. The UCC balance for the current year is hence 361,267.20, and a net rental income of 15,300 prior to any CCA deduction. Because she is having trouble with her tenants, she decides to sell it, and the buyer got it for 555,000 credits, 120,000 of which is for the land and 435,000 is for the building. So 27,500 credits are, in fact, recorded for capital gains, and 38,732.80 in CCA recapture. The total taxable income is hence 136,776.80 and she hit the maximum liabilities for SPP and EI, 5,187.60 and 1,716.44 respectively, while the net TVA remittance is 3,527.20. The game was not over since the childcare costs are to be charged to the lower of the two.

 

[Griet van Vliet]

Ouch: these clients have high tax liabilities! she thought with a sad face. 105,500 credits being the gross salary, with withheld income taxes of 18,500 credits. And, of course, the EI contributions of 836, SPP for 2,564, professional association dues of 1,200, RPP contributions of 4,200, matched by the employer as well, and a 20,000 credit bonus, half of which has been paid in the current year, and the other half is still payable to him. Birthday gifts of a total value of 1,350 were given to him, the employer provided him, for 11 months (it spent a total of 1 month in a garage), with a speeder that the employer leases for 523 credits/month, including a payment of 51 credits/month for insurance, and drove the speeder for 58,000 km, only 5,000 of which were for personal use. He was refunded 80% of the 5,600 spent on meals eaten at work. The hardest part is determining how the speeder allowance is made, since he is eligible for the reduced standby charge, by virtue of driving more than 90% for work. So Griet makes a schedule listing all his deductible employment expenses, starting with the gross salary:

• Gross salary 105,500
• RPP (4,200)
• Gifts 850
• Professional association dues (1,200)
• Standby charge (2/3*472*11)*5000/18337 = 943.81
• Operating benefit 471.90
• Meals deduction (560)
• Net salary 101,805.71

 

[Griet van Vliet]

Moving expenses: he got closer by 110km to his new workplace by virtue of his employer having him move. Hence the allowable expenses are, well, allowed. Buying costs of the new home (if there was an old home sold as well), meals and lodging for up to 15 days at the new location, plus those consumed en-route, selling costs of the old home, legal fees related to address changes, utilities fees and property taxes if the old home is vacant but not yet sold, the cost of moving goods, the cost of travel. The 18,000 credit loss was not deductible, and neither were the unpaid tax bill because he incurred the loss by selling the home, nor were the repair costs. Thus he was to deduct 11,620 in commission costs, 1,250 in legal fees to sell the old home, 1,460 in legal fees for the new home and travel costs of 3,460, so 17,420 since he didn't receive one credit from his employer for that. However, he has a taxable 1,500 for his payment from his home loss. And before she could even dare touch the medical expenses, she had to consider the inheritance portion of the grandfather's Porg farm.