ch18 - class exercises and multiple choice

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Jun 7, 2024

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12. Columbia Corp.'s partial income statement for its first year of operations is as follows: Income before income taxes $ 1,750,000 Income tax expense Current $ 483,000 Deferred 42,000 525,000 Net income $ 1,225,000 Columbia uses straight-line depreciation for financial reporting purposes and CCA for tax purposes. The depreciation expense for the year was $ 700,000. Except for depreciation, there were no other differences between accounting income and taxable income. Assuming a 30% tax rate, what amount was claimed for CCA on the corporation's tax return for the year? a) $ 560,000 b) $ 665,000 c) $ 700,000 d) $ 840,000 Answer: d Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 30% × Temporary Difference = $ 42,000; Temporary Difference = $ 42,000 ÷ 30% = $ 140,000; $ 700,000 + $ 140,000 = $ 840,000 13. At the end of 2020, its first year of operations, Kali Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income $ 800,000 Estimated lawsuit expense 400,000 Excess CCA for tax purposes (900,000 ) Taxable income $ 300,000 The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Kali adheres to IFRS requirements. The current income tax payable is a) $ 0. b) $ 75,000. c) $ 150,000. d) $ 200,000. Answer: b Difficulty: Medium 18-1

Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 300,000 × 25% = $ 75,000 14. Macintyre Inc. sells household furniture on an instalment basis. Customers make payments in equal monthly instalments over a two-year period, with no down payment required. Macintyre's gross profit on instalment sales is 40% of the selling price. For book purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the instalment method is used. There are no other accounting and income tax accounting differences, and Macintyre's income tax rate is 30%. If Macintyre's December 31, 2020, SFP includes a deferred tax liability of $ 90,000 arising from the difference between accounting and tax treatment of the instalment sales, it should also include instalment accounts receivable of a) $ 750,000. b) $ 300,000. c) $ 225,000. d) $ 90,000. Answer: a Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 90,000 ÷ 30% = $ 300,000 temporary difference $ 300,000 ÷ 40% = $ 750,000 15. Bare Fashions Corp. reported pre-tax accounting income of $ 300,000 for calendar 2020. To calculate the income tax liability, the following data were considered: Life insurance proceeds on the death of the CEO$ 130,000 CCA in excess of depreciation 20,000 Instalment tax payments made during 2020 25,000 Enacted income tax rate for 2020 30% What amount should Bare Fashion report as its current income tax liability on its December 31, 2020 SFP? a) $ 20,000 b) $ 26,000 c) $ 45,000 18-2

d) $ 51,000 Answer: a Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 300,000 – $ 130,000 – $ 20,000) × 30% = $ 45,000; $ 45,000 – $ 25,000 = $ 20,000 16. Shierling Corp. reported pre-tax accounting income of $ 750,000 for calendar 2020. To calculate the income tax liability, the following data were considered: Non-taxable portion of capital gains $ 30,000 CCA in excess of depreciation 60,000 Instalment tax payments made during 2020 150,000 Enacted income tax rate for 2020 30% What amount should Shierling report as its current income tax liability on its December 31, 2020 SFP? a) $ 198,000 b) $ 75,000 c) $ 66,000 d) $ 48,000 Answer: d Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 750,000 – $ 30,000 – $ 60,000) × 30% = $ 198,000; $ 198,000 – $ 150,000 = $ 48,000 17. For calendar 2020, Peanuts Corp. prepared the following reconciliation of accounting income to taxable income: Pre-tax accounting income $ 750,000 Add reversible difference Construction contract revenue which will reverse in 2021100,000 Deduct reversible difference Depreciation expense, which will reverse in equal amounts in each of the next four years (400,000) Taxable income $ 450,000 18-3

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Peanut’s income tax rate is 25% for 2020. What amount should the corporation report in its 2020 income statement as current income tax expense? a) $ 25,000 b) $ 112,500 c) $ 187,500 d) $ 212,500 Answer: b Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 450,000 × 25% = $ 112,500 18. For calendar 2020, its first year of operations, Lion Ltd. reported pre-tax accounting income of $ 100,000. Lion uses CCA for tax purposes and straight-line depreciation for financial reporting. The differences between depreciation and CCA over the five-year life of their assets, and the enacted tax rates for 2020 to 2024 are as follows: Depreciation Over (Under) CCA Tax Rates 2020 $ (20,000) 35% 2021 (26,000) 30% 2022 (6,000) 30% 2023 24,000 30% 2024 28,000 30% There are no other reversible differences. On Lion's December 31, 2020 SFP, the deferred tax liability and the current income taxes payable should be Deferred Current Income Tax Liability Taxes Payable a) $ 7,000 $ 28,000 b) $ 15,600 $ 28,000 c) $ 6,000 $ 28,000 d) $ 6,000 $ 24,000 Answer: c Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. 18-4

Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 20,000 × 30% = $ 6,000; ($ 100,000 – $ 20,000) × 35% = $ 28,000 19. Casey Inc. uses the accrual method of accounting for financial reporting purposes and the instalment method of accounting for income tax purposes. Instalment income of $ 930,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates 2020 $ 120,000 35% 2021 180,000 30% 2022 270,000 30% 2023 360,000 25% The instalment income is Casey's only reversible difference. What amount should be included as the deferred tax liability on their December 31, 2020 SFP? a) $ 225,000 b) $ 243,000 c) $ 256,500 d) $ 315,000 Answer: a Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 180,000 × 30%) + ($ 270,000 × 30%) + ($ 360,000 × 25%) = $ 225,000 20. On January 1, 2020, Wings Inc. purchased a machine for $ 270,000, which will be depreciated $ 27,000 annually for book purposes. For income tax reporting, the asset is a Class 8 asset with a CCA rate of 20%, subject to the half year rule for 2020. Assume a present and future enacted income tax rate of 30%. What amount should be added to Wings' deferred tax liability for the difference between depreciation and CCA at December 31, 2020? a) $ 16,200 b) $ 9,000 c) $ 8,100 d) $ 0 18-5

Answer: d Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 270,000 × 20% × 1 ÷ 2 = $ 27,000. There is no reversible difference in 2020. 21. For calendar 2020, Melvin Corp. reported depreciation expense of $ 800,000 on its income statement, but on its 2020 income tax return, Melvin claimed CCA of $ 1,200,000. The 2020 income statement also included $ 150,000 in accrued warranty expense that will be deducted for tax purposes when paid. Melvin's income tax rates are 30% for 2020 and 2021, and 24% for 2022 and 2023. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2021 $ 160,000 $ 30,000 2022 140,000 50,000 2023 100,000 70,000 $ 400,000 $ 150,000 These were Melvin's only reversible differences. At December 31, 2020, Melvin’s deferred tax liability should be a) $ 67,800. b) $ 73,200. c) $ 75,000. d) $ 133,800. Answer: a Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 160,000 – $ 30,000) × 30% = $ 39,000; ($ 140,000 – $ 50,000) × 24% = $ 21,600; ($ 100,000 – $ 70,000) × 24% = $ 7,200; $ 39,000 + $ 21,600 + $ 18-6

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7,200 = $ 67,800 22. For calendar 2020, its first year of operations, Snow Corp. reported pre-tax accounting income of $ 330,000 and taxable income of $ 600,000. The only reversible difference is accrued warranty costs, which are expected to be paid as follows: 2021 $ 90,000 2022 45,000 2023 45,000 2024 90,000 The enacted income tax rates are 35% for 2020, 30% for 2021, 2022 and 2023, and 25% for 2024. The deferred tax asset reported on Snow’s December 31, 2020 SFP should be a) $ 54,000. b) $ 63,000. c) $ 76,500. d) $ 94,500. Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 90,000 + $ 45,000 + $ 45,000) × 30% = $ 54,000; $ 90,000 × 25% = $ 22,500; $ 54,000 + $ 22,500 = $ 76,500 23. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Taxable Temporary Deductible Temporary Differences Differences a) yes yes b) yes no c) no yes d) no no Answer: a Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities 18-7

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 24. A deferred tax liability is the a) current tax consequence of a taxable temporary difference. b) current tax consequence of a deductible temporary difference. c) future tax consequence of a deductible temporary difference. d) future tax consequence of a taxable temporary difference. Answer: d Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 25. Total income tax expense for a corporation consists of a) current tax expense and deferred tax expense. b) current tax expense only. c) deferred tax expense only. d) The deferred tax asset minus any deferred tax liability. Answer: a Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 26. A corporation records an unrealized loss on FV-NI investments. This would result in what type of difference and in what type of deferred tax account? Type of Difference Deferred tax a) Reversible Liability b) Reversible Asset c) Permanent Liability d) Permanent Asset Answer: b Difficulty: Medium 18-8

Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 27. A deferred tax asset is the a) current tax consequence of a taxable temporary difference. b) current tax consequence of a deductible temporary difference. c) future tax consequence of a deductible temporary difference. d) future tax consequence of a taxable temporary difference. Answer: c Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 28. If a corporation prepares an adjusting entry to credit the deferred tax asset account, this should represent a) additional future income taxes payable. b) a transfer to the deferred tax liability account. c) the reversal of a deferred tax benefit that originated in a prior year. d) the reversal of a deferred tax expense that originated in a prior year. Answer: c Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 29. On January 2, 2019, Brunswick Corp. purchased a depreciable asset for $ 600,000. The asset has an estimated 4-year life with no residual value. Straight-line depreciation is being used for financial statement purposes but the following CCA amounts will be deducted for tax purposes: 2019 $ 150,000 2022 $ 56,250 2020 225,000 2023 28,125 2021 112,500 2024 28,125 18-9

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Assuming an income tax rate of 30% for all years, the deferred tax liability that should be reflected on Brunswick's SFP at December 31, 2020, should be a) $ 22,500. b) $ 33,750. c) $ 45,000. d) $ 50,625. Answer: a Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 600,000 – $ 150,000 – $ 150,000) – ($ 600,000 – $ 150,000 – $ 225,000) $ 75,000 × 30% = $ 22,500 30. A reconciliation of Quebec Corp.'s pre-tax accounting income with its taxable income for 2020, its first year of operations, is as follows: Pre-tax accounting income $ 3,000,000 Excess CCA (90,000 ) Taxable income $ 2,910,000 The excess CCA will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2020, 35% in 2021, and 30% in both 2022 and 2023. The total deferred tax liability to be reported on Quebec's SFP at December 31, 2020 is a) $ 36,000. b) $ 31,500. c) $ 30,000. d) $ 28,500. Answer: d Difficulty: Easy Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 30,000 × 35%) + ($ 30,000 × 30%) + ($ 30,000 × 30%) = $ 28,500 31. At the end of 2020, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income $ 300,000 18-10

Estimated lawsuit expense 750,000 Instalment sales (600,000 ) Taxable income $ 450,000 The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax liability to be recorded is a) $ 180,000. b) $ 90,000. c) $ 67,500. d) $ 45,000. Answer: a Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 600,000 × 30% = $ 180,000 32. At the end of 2020, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income $ 300,000 Estimated lawsuit expense 750,000 Instalment sales (600,000 ) Taxable income $ 450,000 The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The total income tax expense to be reported on the income statement is a) $ 90,000. b) $ 135,000. c) $ 150,000. d) $ 300,000. Answer: a Difficulty: Hard Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Income tax payable = $ 450,000 × 30% = $ 135,000 18-11

Change in deferred tax liability = $ 600,000 × 30% = $ 180,000 Change in deferred tax asset = $ 750,000 × 30% = $ 225,000 $ 135,000 + $ 180,000 – $ 225,000 = $ 90,000 33. At the end of 2020, its first year of operations, Halifax Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income $ 800,000 Estimated lawsuit expense 400,000 Excess CCA for tax purposes (900,000 ) Taxable income $ 300,000 The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Halifax adheres to IFRS requirements. The deferred tax liability to be recorded is a) $ 225,000. b) $ 200,000. c) $ 100,000. d) $ 0. Answer: a Difficulty: Easy Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 900,000 × 25% = $ 225,000 34. In its 2020 income statement, its first year of operations, Penelope Corp. reported depreciation of $ 525,000 and interest revenue from a Canadian corporation of $ 105,000. For 2020 income tax purposes, Maine claimed CCA of $ 825,000. The difference in depreciation/CCA will reverse in equal amounts over the next three years. Penelope's income tax rates are 35% for 2020, 30% for 2021, and 25% for both 2022 and 2023. What amount should be included as the deferred tax liability on Penelope's December 31, 2020 SFP? a) $ 99,000 b) $ 90,000 c) $ 80,000 d) $ 75,000 Answer: c Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. 18-12

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Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 825,000 - $ 525,000 = $ 300,000; ($ 100,000 × 30%) + ($ 100,000 × 25%) + ($ 100,000 × 25%) = $ 80,000 Ex. 18-61 Calculation of taxable income The records for Kalman Inc. show the following data for calendar 2020: 1. Gross profit on instalment sales recorded on the books was $ 100,000. Gross profit from collections of instalment receivables was $ 50,000. 2. Golf club dues were $ 3,800. 3. Machinery was acquired in January 2020 for $ 300,000. Kalman uses straight- line depreciation over a ten-year life (no residual value). For tax purposes, Kalman uses CCA at 14% for 2020 after considering the half-year rule. 4. Dividends received from a Canadian corporation were $ 4,000. 5. The estimated warranty liability related to 2020 sales was $ 19,600. Warranty repair costs paid during 2020 were $ 13,600. The remainder will be paid in 2021. 6. Pre-tax accounting income is $ 250,000. The enacted income tax rate is 25%. Instructions a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income. b) Prepare the required adjusting journal entries to record income taxes for 2020. Solution 18-61 a) Pre-tax financial income ...................................................... $ 250,000 Permanent differences Golf dues (add back) .................................................... 3,800 Dividends (deduct) ....................................................... (4,000) Reversible differences Instalment sales ($ 100,000 – $ 50,000) ...................... (50,000) CCA ($ 42,000 – $ 30,000) ........................................... (12,000) Warranty expense ($ 19,600 – $ 13,600) ..................... 6,000 Taxable income .................................................................. $ 193,800 b) Current Tax Expense .......................................................... 48,450 Income Tax Payable 25% × $ 193,800 ........................ 48,450 Deferred Tax Expense ....................................................... 14,000 Deferred Tax Asset 25% × $ 6,000 .................................... 1,500 Deferred Tax Liability 25% × ($ 50,000 + $ 12,000)... 15,500 Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. 18-13

Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex. 18-62 Future income taxes Pan Corp., at the end of 2020, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: Pre-tax accounting income $ 300,000 Estimated warranty expenses deductible when paid 800,000 Excess CCA (600,000 ) Taxable income $ 500,000 Estimated warranty expenses of $ 530,000 will be deductible in 2021, $ 200,000 in 2022, and $ 70,000 in 2023. The use of the depreciable assets will result in taxable amounts of $ 200,000 in each of the next three years. The enacted tax rate is 30% and is not expected to change. Instructions a) Prepare a schedule of the future taxable and deductible amounts. b) Prepare the required adjusting journal entries to record income taxes for 2020. Solution 18-62 a) 2021 2022 2023 Total Future taxable (deductible) amounts Warranties $ (530,000) $ (200,000) $ (70,000)$ (800,000) Excess CCA 200,000 200,000 200,000 600,000 b) Current Tax Expense $ 500,000 x 30% .............................. 150,000 Income Tax Payable .................................................... 150,000 Deferred Tax Asset 800,000 x 30% .................................... 240,000 Deferred Tax Liability $ 600,000 × 30% ...................... 180,000 Deferred Tax Expense .................................................. 60,000 Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities 18-14

Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex. 18- 63 Calculation of taxable income The records for Gursoy Inc. show the following data for calendar 2020: 1. Pre-tax accounting income is $ 175,000. The enacted income tax rate is 28%. 2. The gross profit on construction contract calculated using percentage of completion recorded on the books was $ 100,000. No contracts were completed in 2020 and so the gross profit for tax purposes was $ 0. 3. Interest paid on late and deficient tax instalments was $ 3,000. 4. Equipment was acquired in January 2020 for $ 300,000. Gursoy uses straight- line depreciation over a ten-year life (no residual value). For tax purposes, Gursoy uses CCA at 30% for 2020. 5. Gursoy held FV-NI investments on which $ 1,500 unrealized losses were recorded at the end of 2020. Instructions a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income. b) Prepare the required adjusting journal entries to record income taxes for 2020. c) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place. Solution 18-63 a) Pre-tax financial income ...................................................... $ 175,000 Permanent difference Interest paid on late and deficient tax instalments ...... 3,000 Reversible differences Completed contact construction ($ 100,000 – $ 0) ...... (100,000) CCA ($ 45,000 – $ 30,000) ........................................... (15,000) FV-NI Investment unrealized losses ............................. 1,500 Taxable income .................................................................. $ 64,500 b) Current Tax Expense .......................................................... 18,060 Income Tax Payable 28% × $ 64,500 .......................... 18,060 Deferred Tax Expense ........................................................ 31,780 Deferred Tax Asset 28% × $ 1,500 .................................... 420 Deferred Tax Liability ($ 100,000 + $ 15,000) x 28% . 32,200 c) Effective Tax Rate = $ 18,060/$ 175,000 10.3% Adjustment for permanent differences (0.5%) 18-15

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= ($ 3,000 x 28%)/$ 175,000 Adjustment for reversing differences = [($ 100,000 + $ 15,000 - $ 1,500) x 28%)]/$ 175,000 18.2% Statutory Tax Rate 28.0% Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex. 18-64 Deferred income taxes Seenath Ltd., at the end of 2020, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: Pre-tax accounting income $ 300,000 Excess CCA claimed for tax purposes (600,000) Estimated expenses deductible when paid 500,000 Taxable income $ 200,000 Use of the depreciable assets will result in taxable amounts of $ 200,000 in each of the next three years. The estimated expenses of $ 500,000 will be deductible in 2023 when settlement is expected to be made. The enacted tax rate is 25% and is not expected to change. Instructions a) Prepare a schedule of the deferred taxable and deductible amounts. b) Prepare the required adjusting journal entries to record income taxes for 2020. Solution 18-64 a) 2021 2022 2023 Total Future taxable (deductible) amounts CCA $ 200,000 $ 200,000 $ 200,000 $ 600,000 Expenses (500,000) (500,000) b) Current Tax Expense $ 200,000 × 25% ........................... 50,000 Income Tax Payable ................................................... 50,000 Deferred Tax Expense ...................................................... 25,000 Deferred Tax Asset $ 500,000 × 25% .............................. 125,000 Deferred Tax Liability $ 600,000 × 25% .................... 150,000 18-16

Difficulty: Medium Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities Learning Objective: Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex. 18-66 Change in tax rates Vansatia Construction Inc. uses the completed contract method for tax purposes and the percentage completion method for accounting purposes Assume that on July 15, 2020, a new income tax rate is enacted that lowers the corporate rate from 30% to 28%, effective January 1, 2022. Vansatia Construction Inc. has one temporary difference at the beginning of 2020 related to $ 1 million tax deferral from using the completed contract method. Vansatia therefore had a Deferred Tax Liability account at January 1, 2020 with a balance of $ 300,000 ($ 1,000,000 × 30%). The $ 1,000,000 in gross profit recognized to date is expected to be taxed in 2023. Instructions a) Calculate the deferred tax liability at July 15, 2020 after taking into account the change in tax rates and prepare the related journal entry at that date. b) Discuss if the impact of the change in rates is required to be disclosed or not under IFRS and ASPE. Solution 18-66 The deferred tax liability at July 15, 2020 for Vansatia Construction Inc. is now $ 800,000, as shown below: Total 2021 2022 2023 Future taxable amounts $ 1,000,000 $ 0 $ 0 $ 1,000,000 Tax rate 30% 28% 28% Revised deferred tax liability $ 280,000 $ 0 $ 0 $ 280,000 18-17

An entry is made on July 15, 2020 to recognize the $ 20,000 decrease ($ 300,000 – $ 280,000) in the deferred tax liability: Deferred Tax Liability 28,000 Deferred Tax Benefit 28,000 b) While ASPE does not require separate disclosure of the future tax expense or benefit due to a change in tax rates, IFRS does. Difficulty: Medium Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Revision of Future Tax Rates. Learning Objective: Identify the major differences between IFRS and ASPE for income taxes. Section Reference: A Comparison of IFRS and ASPE Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation. Section Reference: Disclosure Requirements CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex. 18-67 Taxable loss carryforward without valuation allowance (IFRS) In 2020, its first year of operations, Liu Inc. reported a $ 500,000 loss for tax purposes. However, in 2021, Liu reported $ 200,000 taxable income. The tax rate is 25%, and is likely to remain at this rate for the foreseeable future. Harriet reports under IFRS. Assume that, at the end of 2020, because it is a new company, Liu’s management thought that it was probable that the loss carryforward would not be realized in the near future. However, by the end of 2021, management feels it is now probable that there will be future taxable incomes against which the 2020 loss could be applied. Instructions a) What entries (if any) would be prepared in 2020 to record the loss carryforward? b) What entries (if any) would be prepared in 2021 to record current and deferred taxes and to recognize the loss carryforward? Solution 18-67 a) Since management feels it is probable that the loss carryforward would not be realized in the near future, no journal entry is required. b) Current Tax Expense ($ 200,000 × 25%) ........................... 50,000 Deferred Tax Benefit .................................................... 50,000 18-18

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Deferred Tax Asset ............................................................ 75,000 Deferred Tax Benefit ($ 300,000 × 25%) ..................... 75,000 Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryforward Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex. 18-68 Taxable loss carryforward with valuation allowance (ASPE) In 2020, its first year of operations, Jersey Inc. reported a $ 200,000 loss for tax purposes. However, in 2021, Jersey reported $ 250,000 taxable income. The tax rate is 20%, and is likely to remain at this rate for the foreseeable future. Jersey is a private corporation reporting under ASPE. Assume Jersey’s management thinks, at the end of 2020, that it is likely that the loss carryforward will not be realized in the near future. Jersey chooses to use the valuation allowance method for loss carryforwards. Instructions a) What entries (if any) would be prepared in 2020 to record the loss carryforward? b) What entries (if any) would be prepared in 2021 to record the current and future income taxes and to recognize the loss carryforward? Solution 18-68 a) Future Income Tax Asset ($ 200,000 × 20%) .................... 40,000 Future Income Tax Benefit ........................................... 40,000 Future Income Tax Expense ............................................... 40,000 Allowance to Reduce Future Income Tax Asset to Expected Realizable Value ............................. 40,000 b) Current Income Tax Expense $ 50,000 × 20% ................. 10,000 Income Tax Payable ..................................................... 10,000 Future Income Tax Expense ............................................... 40,000 Future Income Tax Asset ............................................. 40,000 Allowance to Reduce Future Income Tax: Asset to Expected Realizable Value ................................... 40,000 Future Income Tax Benefit ........................................... 40,000 Difficulty: Hard Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryforward Illustrated 18-19

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Ex 18-69 Presentation of Deferred Tax Asset accounts Describe how the presentation of deferred or future tax asset and liability accounts differs under IFRS and ASPE? Solution 18-69 Under IFRS all deferred tax assets and liabilities are reported as non-current items on a classified SFP. Under ASPE the future income tax assets and future income tax liabilities are segregated into current and non-current categories. The classification of an individual future income tax liability or asset into current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference. Difficulty: Medium Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation. Section Reference: Statement of Financial Position Presentation Learning Objective: Identify the major differences between IFRS and ASPE for income taxes. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic Ex. 18-70 Taxes payable method and disclosure Gursol Exchange Inc., is arriving at the financial statement disclosures for the 2020 financial statement note on income taxes. The company uses ASPE, and follows the taxes payable method. The statutory tax rate is currently 25%. During 2020, income before tax was $ 170,000. CCA exceeded depreciation expense by $ 45,000. Gursol paid interest on late and deficient tax instalments of $ 18,000 during 2020. Instructions a) Determine the income tax expense to be recorded using the taxes payable method and record the necessary journal entry. b) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place. Solution 18-70 a) 18-20

Accounting income before adjustments $ 170,000 Add: Interest penalty on late and deficient instalments 18,000 Less: CCA in excess of depreciation (45,000) Taxable income $ 143,000 Income tax expense @ 25% $ 35,750 Current Tax Expense ................................................... 35,750 Income Tax Payable ........................................... 35,750 b) Effective Tax Rate = $ 35,750/$ 170,000 21.0% Adjustment for permanent differences = ($ 18,000 x 25%)/$ 170,000 (2.6%) Adjustment for reversing differences = ($ 45,000 x 25%)/$ 170,000 6.6% Statutory Tax Rate 25.0% Difficulty: Medium Learning Objective: Identify the major differences between IFRS and ASPE for income taxes. Section Reference: Taxes Payable Method Section Reference: Disclosure Requirements CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 18-21

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