Jordan Corporation reports under IFRS. The following information applies to Jordan Corporation.
1. Prior to 2010, taxable income and accounting income were identical.
2. Accounting income was $1.7 million in 2010 and $1.4 million in 2011.
3. On January 1, 2010, equipment costing $1 million was purchased. It is being depreciated on a straight-line basis over eight years for financial reporting purposes, and is a Class 8-20% asset for tax purposes.
4. Tax-exempt interest income of $60,000 was received in 2011.
5. The tax rate is 35% for all periods.
6. Taxable income is expected in all future years.
7. Jordan Corporation had 100,000 common shares outstanding throughout 2011.
Instructions
(a) Calculate the amount of capital cost allowance and depreciation expense for 2008 and 2011, and the corresponding carrying amount and undepreciated capital cost of the depreciable assets at the end of 2010 and 2011.
(b) Determine the amount of current and future income tax expense for 2011.
(c) Prepare the journal entry(ies) to record 2011 income taxes.
(d) Prepare the bottom portion of Jordan's 2011 income statement, beginning with the line "Income before income taxes." (e) Indicate how future income taxes should be presented on the December 31, 2011 balance sheet.
(f) How would your responses to (d) and (e) change if Jordan Corporation followed the PE GAAP future income taxes method?
(a)
Basic Calculations of Capital Cost Allowance, Depreciation and Balances:
| | | | | | | C-B | ||||
| (A) | | (B) | (A – B) | (C) | (A – C) | Reversing | ||||
Year | Base | | CCA | UCC | Deprec. | Carrying Amount | Difference | ||||
2010 | $1,000,000 | X 20 % X .5 | $100,000 | $ 900,000 | $125,000 | $875,000 | $25,000 | ||||
2011 | 900,000 | X 20 % | 180,000 | 720,000 | 125,000 | 750,000 | (55,000) | ||||
(b)
2011
| | | | | Future | PE (GAAP) |
Balance Sheet | | | (Taxable) | | Tax | Current |
Account | Carrying | Tax | Temporary | Tax | Asset | or Long- |
Dec. 31, 2011 | Amount | Basis | Differences | Rate | (Liability) | Term |
Property, plant & equip. | $750,000 | $720,000 | ($30,000) | 35% | ($10,500) | LT |
Future income tax liability, December 31, 2011 | (10,500) | | ||||
Future income tax asset before adjustment ($25,000 X 35%) | 8,750 | | ||||
Incr. in future income tax liability and future income tax expense for 2011 | ($19,250) | |
Calculation of current income tax expense: | |
Accounting income | $ 1,400,000 |
Permanent difference – tax exempt interest | (60,000) |
| 1,340,000 |
Reversing difference - [part (a)] | 55,000 |
Taxable income on regular operations | 1,285,000 |
Income tax expense and payable @ 35 % | $ 449,750 |
| |
(c)
Current Income Tax Expense.......... 449,750
Income Tax Payable.............. 449,750
Future Income Tax Expense........... 19,250
Future Income Tax Liability..... 10,500 *
Future Income Tax Asset......... 8,750*
* Alternately
Future Income Tax Asset/Liability 19,250
(d) Income before income taxes $1,400,000
Income tax expense
Current $449,750
Future 19,250 469,000
Net income $ 931,000
Earnings per share:Net Income | $9.31 |
| |
(e) Net future income tax liability at December 31, 2011.
(See part (b))
Long-term liabilities
Future income tax liability $10,500
(f) Balance sheet disclosure would be the same under PE GAAP – FIT method as under IFRS since all temporary differences relate to differences between the tax basis and carrying amount of property, plant and equipment. The future income tax liability would be included with non-current liabilities.
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