The following information was disclosed during the audit of Shawna Inc.
Amount Due per
Year Tax Return
2011 ……………………. $140,000
2012 ……………………. 112,000
1. On January 1, 2011, equipment was purchased for $400,000. For financial reporting purposes, the company uses straight-line depreciation over a five-year life, with no residual value. For tax purposes, the CCA rate is 25%.
2. In January 2012, $225,000 was collected in advance for the rental of a building for the next three years. The entire $225,000 is reported as taxable income in 2012, but $150,000 of the $225,000 is reported as unearned revenue on the December 31, 2012 balance sheet. The $150,000 of unearned revenue will be earned equally in 2013 and 2014.
3. The tax rate is 40% in 2011 and all subsequent periods.
4. No temporary differences existed at the end of 2010. Shawna expects to report taxable income in each of the next five years. Its fiscal year ends December 31.
Shawna Inc. follows IFRS.
Instructions
(a) Calculate the amount of capital cost allowance and depreciation expense for 2011 and 2012, and the corresponding carrying amount and undepreciated capital cost of the depreciable assets at December 31, 2011 and 2012.
(b) Determine the balance of the future income tax asset or liability account at December 31, 2011, and indicate the account’s classification on the balance sheet.
(c) Prepare the journal entry(ies) to record income taxes for 2011.
(d) Draft the bottom of the income statement for 2011, beginning with “Income before income taxes.”
(e) Determine the balance of the future income tax asset or liability account at December 31, 2012, and indicate the account’s classification on the December 31, 2012 balance sheet.
(f) Prepare the journal entry(ies) to record income taxes for 2012.
(g) Prepare the bottom of the income statement for 2012, beginning with “Income before income taxes.”
(h) Provide the comparative balance sheet presentation for the future tax balance sheet accounts at December 31, 2011 and 2012. Be specific about the classification.
(i) Is it possible to have more than two accounts for future taxes reported on a balance sheet? Explain.
(j) How would your response to (h) change if Shawna Inc. reported under the PE GAAP future income taxes method?
(a)
Basic Calculations of Capital Cost Allowance, Depreciation and Balances:
| | | | | | | C – B | ||||
| (A) | | (B) | A – B | (C) | Carrying | Reversing | ||||
Year | Base | | CCA | UCC | Deprec. | Amount | Difference | ||||
2011 | $400,000 | X 25 % X .5 | $ 50,000 | $ 350,000 | $80,000 | $320,000 | $30,000 | ||||
2012 | 350,000 | X 25 % | 87,500 | 262,500 | 80,000 | 240,000 | (7,500) | ||||
(b)
2011
Balance Sheet | | | Deductible | | Future | (PE GAAP) Current |
Account | Carrying | Tax | Temporary | Tax | Tax | or Long- |
Dec. 31, 2011 | Amount | Basis | Differences | Rate | Asset | Term |
Property, plant, & equip. | $320,000 | $350,000 | $30,000 | 40% | $12,000 | LT |
Future income tax asset, December 31, 2011 | 12,000 | | ||||
Future income tax account before adjustment | 0 | | ||||
Incr. in future income tax asset and future income tax benefit for 2011 | $12,000 | |
(c)
Future Income Tax Asset................. 12,000
Future Income Tax Benefit.... 12,000
Current Income Tax Expense.......... 140,000
Income Tax Payable.............. 140,000
(amount given in the problem)
$140,000 taxes due for 2011 ÷ 40% (2011 tax rate) = $350,000 taxable income for 2011.
(d) Income before income taxes $320,000 a
Income tax expense
Current $140,000
Future benefit (12,000 ) 128,000
Net income $192,000
aPretax accounting income $ X
Excess depreciation per books [from (a) above] 30,000
Taxable income [from (c) above] $350,000
Solving for X; X + $30,000 = $350,000; X = $320,000 pretax accounting income.
(e)
2012
Balance Sheet | | | Deductible | | Future | (PE GAAP) Current |
Account | Carrying | Tax | Temporary | Tax | Tax | or Long- |
Dec. 31, 2012 | Amount | Basis | Differences | Rate | Asset | Term |
Property, plant & equip. | $240,000 | $262,500 | $22,500 | 40% | $9,000 | LT |
Unearned Rev. – current | 75,000* | 0 | 75,000 | 40% | 30,000 | C |
Unearned Rev. – non-curr. | 75,000* | 0 | 75,000 | 40% | 30,000 | LT |
Future income tax asset, December 31, 2012 | 69,000 | | ||||
Future income tax asset before adjustment | 12,000 | | ||||
Incr. in future income tax asset and future income tax benefit for 2012 | $57,000 | |
* $150,000 unearned at end of 2012 divided by 2 years (2013 and 2014)
(f)
Future Income Tax Asset................. 57,000
Future Income Tax Benefit....... 57,000
Current Income Tax Expense.......... 112,000
Income Tax Payable.............. 112,000
(amount given in the problem)
$112,000 taxes due for 2012 ÷ 40% (2011 tax rate) = $280,000 taxable income for 2012
(g) Income before income taxes $137,500 d
Income tax expense
Current $112,000
Future (57,000 ) 55,000
Net income $ 82,500
dPretax accounting income $ X
CCA in excess of depreciation [from (a) above] (7,500)
Excess rent collected over rent earned 150,000
Taxable income [from (f) above] $280,000
Solving for X:
X + $150,000 – $7,500 = $280,000
X = $137,500 pretax accounting income.
(h) Refer to last column in tables of part (a) and (e) above.
2012 2011
Current assets
Future income tax asset $69,000 $12,000
($30,000 + $30,000 + $9,000)
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
(i) When financial statements of several legal entities are consolidated into one for financial reporting purposes, the possibility exists that future tax accounts could have original classifications on the individual balance sheets that are not in common or are related to taxes from different jurisdictions. Since there is no right to offset taxes between jurisdictions, there is a possibility of having four captions for future taxes on the consolidated balance sheet under PE GAAP. For example, there could be two current and two long term future tax asset/liability accounts (two for each entity). Under IFRS there would be two future tax asset/liability accounts (one for each entity) since deferred tax assets/liabilities are classified as non-current items on a classified statement of financial position.
(j)
Refer to last column in tables of part (a) and (e) above.
2012 2011
Current assets
Future income tax asset $30,000
Non-current assets
Future income tax asset 39,000* $12,000
*($30,000 + $9,000)
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.
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