The accounting records of Steven Corp., a real estate developer, indicated income before taxes of $850,000 for its year ended December 31, 2011, and of $525,000 for the year ended December 31, 2012. The following data are also available.
1. Steven Corp. pays an annual life insurance premium of $11,000 covering the top management team. The company is the named beneficiary.
2. The carrying amount of the company’s property, plant, and equipment at January 1, 2011, was $1,256,000, and the UCC at that date was $998,000. Steven recorded depreciation expense of $175,000 and $180,000 in 2011 and 2012, respectively. CCA for tax purposes was $192,000 and $163,500 for 2011 and 2012, respectively. There were no asset additions or disposals over the two-year period.
3. Steven deducted $211,000 as a restructuring charge in determining income for 2010. At December 31, 2010, an accrued liability of $199,500 (reported in current liabilities) remained outstanding relative to the restructuring. This expense is deductible for tax purposes, but only as the actual costs are incurred and paid for. When the actual restructuring of operations took place in 2011 and 2012, the liability was reduced to $68,000 at the end of 2011 and $0 at the end of 2012.
4. In 2011, property held for development was sold and a profit of $52,000 was recognized in income. Because the sale was made with delayed payment terms, the profit is taxable only as Steven receives payments from the purchaser. A 10% down payment was received in 2011, with the remaining 90% expected in equal amounts over the following three years.
5. Non-taxable dividends of $3,250 in 2011 and of $3,500 in 2012 were received from taxable Canadian corporations.
6. In addition to the income before taxes identified above, Steven reported a before-tax gain on discontinued operations of $18,800 in 2011.
7. A 30% rate of tax has been in effect since 2009.
Steven Corp. follows the PE GAAP future income taxes method.
Instructions
(a) Determine the balance of any future income tax asset or liability accounts at December 31, 2010, 2011, and 2012.
(b) Determine 2011 and 2012 taxable income and current income tax expense.
(c) Prepare the journal entries to record current and future income tax expense for 2011 and 2012.
(d) Identify how the future income tax asset or liability account(s) will be reported on the December 31, 2011 and 2012 balance sheets.
(e) Prepare partial income statements for the years ended December 31, 2011 and 2012, beginning with the line “Income from continuing operations before income tax.”
(f) How would your response to (d) change if Steven Corp. reported under IFRS?
(a)
PP&E | | Carrying amount | | UCC | | Difference | | Tax 30% | | Future Tax | |||||
Bal. Dec. 31, 2010 | | $ 1,256,000 | | $ 998,000 | | $ (258,000) | | $ (77,400) | | Liability | |||||
For 2011 | | 175,000 | | 192,000 | | (17,000) | | (5,100) | | | |||||
Bal. Dec. 31, 2011 | | 1,081,000 | | 806,000 | | (275,000) | | (82,500) | | Liability | |||||
For 2012 | | 180,000 | | 163,500 | | 16,500 | | 4,950 | | | |||||
Bal. Dec. 31, 2012 | | $ 901,000 | | $ 642,500 | | $ (258,500) | | $ (77,550) | | Liability | |||||
| | | | | | | | | | | |||||
Restructuring Charges | | Accrued Liability | | Tax basis | | Difference | | Tax 30% | | Future Tax | |||||
Bal. Dec. 31, 2010 | | $ (199,500) | | $ -0- | | $199,500 | | $59,850 | | Asset | |||||
For 2011 | | 131,500 | | -0- | | (131,500) | | (39,450) | | | |||||
Bal. Dec. 31, 2011 | | (68,000) | | -0- | | 68,000 | | 20,400 | | Asset | |||||
For 2012 | | 68,000 | | -0- | | (68,000) | | (20,400) | | | |||||
Bal. Dec. 31, 2012 | | $-0- | | $ -0- | | $ -0- | | $ -0- | | | |||||
Profit on Property Sale | | Deferred G/P deducted from A/R | | Deferred Profit for Tax | | Difference | | Tax 30% | | Future Tax | |||||||||
Bal. Dec. 31, 2010 | | $ -0- | | -0- | | -0- | | -0- | | | |||||||||
For 2011 | | -0- | | $ 46,800 | | $ (46,800) | | $ (14,040) | | | |||||||||
Bal. Dec. 31, 2011 | | -0- | | 46,800 | | (46,800) | | (14,040) | | Liability | |||||||||
For 2012 | | -0- | | (15,600) | | 15,600 | | 4,680 | | | |||||||||
Bal. Dec. 31, 2012 | | -0- | | $ 31,200 | | $ (31,200) | | $ (9,360) | | Liability | |||||||||
(b) | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||
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Discontinued operations: | | | |
Accounting income | $ 18,800 | | $0 |
Permanent differences | 0 | | 0 |
Reversing differences | 0 | | 0 |
Taxable income | 18,800 | | 0 |
Current income taxes – 30% | $ 5,640 | | $0 |
(a) and (c)
Balance | | | Deductible | | | (PE GAAP) |
Sheet | | | (Taxable) | | Future Tax | Current |
Account | Carrying | Tax | Temporary | Tax | Asset | or Long- |
Dec. 31, 2010 | Amount | Basis | Differences | Rate | (Liability) | Term |
PP&E | $1,256,000 | $998,000 | ($258,000) | 30% | ($77,400) | LT |
Restructuring Liability | 199,500 | -0- | 199,500 | 30% | 59,850 | C |
Future income tax liability, December 31, 2010 | ($17,550) | |
Balance | | | Deductible | | | (PE GAAP) |
Sheet | | | (Taxable) | | Future Tax | Current |
Account | Carrying | Tax | Temporary | Tax | Asset | or Long- |
Dec. 31, 2011 | Amount | Basis | Differences | Rate | (Liability) | Term |
PP&E | $1,081,000 | $806,000 | ($275,000) | 30% | ($82,500) | LT |
Restructuring Liability | 68,000 | -0- | 68,000 | 30% | 20,400 | C |
Deferred G/P on Sale (A/R) | -0- | 46,800 | (46,800) | 30% | (14,040) | C* |
Future income tax liability, December 31, 2011 Future income tax liability before adjustment Incr. in future income tax liability and future income tax expense for 2011 | (76,140) (17,550) $(58,590) | |
* assumes that all of the A/R is reported in current assets
Balance | | | Deductible | | | (PE GAAP) |
Sheet | | | (Taxable) | | Future Tax | Current |
Account | Carrying | Tax | Temporary | Tax | Asset | Long- |
Dec. 31, 2012 | Amount | Basis | Differences | Rate | (Liability) | Term |
PP&E | $901,000 | $642,500 | ($258,500) | 30% | ($77,550) | LT |
Restructuring Liability | -0- | -0- | -0- | 30% | -0- | C |
Deferred G/P on Sale (A/R) | -0- | 31,200 | (31,200) | 30% | (9,360) | C* |
Future income tax liability, December 31, 2012 Future income tax liability before adjustment Incr. in future income tax liability and future income tax expense for 2012 | (86,910) (76,140) ($10,770) | |
(c) December 31, 2011
Current Income Tax Expense................ 198,735
Income Tax Expense – Discontinued Operations 5,640
Income Tax Payable ................... 204,375
Future Income Tax Expense................. 58,590
Future Income Tax Liability....... 58,590
December 31, 2012
Current Income Tax Expense.............. 148,980
Income Tax Payable ($495,350 X .30). 148,980
Future Income Tax Expense............... 10,770
Future Income Tax Liability......... 10,770
(d) The following presentation is based on the assumption that the Account Receivable for the property sold in 2011 is all included in current assets. If the company reported part of it in non-current assets, 2/3 of the related future income tax liability in 2011 and 1/2 of the related future income tax liability in 2012 would have to be reported as long-term.
Balance sheet 2011
Current assets:
Future tax asset ($20,400 – $14,040) $6,360
Non-current liabilities:
Future tax liability 82,500
Balance sheet 2012
Current liability:
Future tax liability $9,360
Non-current liabilities:
Future tax liability 77,550
Under PE GAAP, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
(e)
Income Statement – 2011 | | | | | |
Income from continuing operations before income taxes | | $850,000 | |||
Income taxes | | | | | |
Current income taxes | | | $198,735 | | |
Future income taxes | | | 58,590 | | 257,325 |
Income from continuing operations | | | | 592,675 | |
Discontinued operations | | | | | |
Gain on disposal of operations | | 18,800 | | | |
Less applicable taxes | | | 5,640 | | 13,160 |
Net income | | | | | $605,835 |
Income Statement – 2012 | | | | | |
Income before income taxes | | | | | $525,000 |
Income taxes | | | | | |
Current income taxes | | | $ 148,980 | | |
Future income taxes | | | 10,770 | | 159,750 |
Net income | | | | | $365,250 |
(f)
Balance sheet 2011
Non-current liabilities:
Future tax liability ($82,500 – $6,360) $76,140
Balance sheet 2012
Non-current liabilities:
Future tax liability ($77,550 – $9,360) $68,190
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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