Use the information for Sorpon Corporation in E18-6, and assume that the company reports accounting income of $180,000 in each of 2012 and 2013, and no temporary differences other than the one identified in E18-6.
In BE Sorpon Corporation purchased equipment very late in 2011. Based on generous capital cost allowance rates provided in the Income Tax Act, Sorpon Corporation claimed CCA on its 2011 tax return but did not record any depreciation as the equipment had not yet been put into use. This temporary difference will reverse and cause taxable amounts of $25,000 in 2012, $30,000 in 2013, and $40,000 in 2014. Sorpon's accounting income for 2011 is $200,000 and the tax rate is 40% for all years. There are no future tax accounts at the beginning of 2011.
Instructions
(a) Calculate the future income tax balances at December 31, 2012 and 2013.
(b) Calculate taxable income and income taxes payable for 2012 and 2013.
(c) Prepare the journal entries to record income taxes for 2012 and 2013.
(d) Prepare the income tax expense section of the income statements for 2012 and 2013, beginning with the line “Income before income taxes.”
(e) What trend do you notice in the amount of net income reported for 2012 and 2013 in part (d)? Is this a coincidence? Explain.
(a) 2012
Balance | | | Deductible | | |
Sheet | | | (Taxable) | | Future Tax |
Account | Carrying | Tax | Temporary | Tax | Asset |
Dec. 31, 2012 | Amount* | Basis* | Differences | Rate | (Liability) |
Equipment | $0 | ($70,000) | ($70,000) | 40% | ($28,000) |
Future income tax liability, December 31, 2012 | (28,000) | ||||
Future income tax liability before adjustment | (38,000) | ||||
Decrease in future income tax liability and future income tax benefit for 2012 | $10,000 |
* Values not provided in this exercise
| | Future years | |||||
| | Total | | 2013 | | 2014 | |
(Taxable) temporary differences | | | | | | | |
Depreciation in excess of CCA | | $70,000 | | $30,000 | | $40,000 | |
Tax rate enacted for the year | | | | 40% | | 40% | |
Future tax (liability) | | $28,000 | | $12,000 | | $16,000 |
(a) (Continued) 2013
Balance | | | Deductible | | |
Sheet | | | (Taxable) | | Future Tax |
Account | Carrying | Tax | Temporary | Tax | Asset |
Dec. 31, 2013 | Amount* | Basis* | Differences | Rate | (Liability) |
Equipment | $0 | ($40,000) | ($40,000) | 40% | ($16,000) |
Future income tax liability, December 31, 2013 | ($16,000) | ||||
Future income tax liability before adjustment | (28,000) | ||||
Decrease in future income tax liability and future income tax benefit for 2013 | $12,000 |
* Values not provided in this exercise
| | Future year | |||||
| | Total | | 2014 | | | |
(Taxable) temporary differences | | | | | | | |
Depreciation in excess of CCA | | $40,000 | | $40,000 | | | |
Tax rate enacted for the year | | | | 40% | | | |
Future tax (liability) | | $16,000 | | $16,000 | | | |
(b)
| 2012 | | 2013 |
Pretax accounting income | $ 180,000 | | $ 180,000 |
Reversing differences – | | | |
CCA < depreciation expense | 25,000 | | 30,000 |
Taxable income | $ 205,000 | | $ 210,000 |
| | | |
Taxable income | $ 205,000 | | $ 210,000 |
Enacted tax rate | X 40% | | X 40% |
Current income tax expense | $ 82,000 | | $ 84,000 |
(c)
2012
Current Income Tax Expense................ 82,000
Income Tax Payable.................... 82,000
Future Income Tax Liability............... 10,000
Future Income Tax Benefit............. 10,000
2013
Current Income Tax Expense................ 84,000
Income Tax Payable.................... 84,000
Future Income Tax Liability............... 12,000
Future Income Tax Benefit............. 12,000
(d)
| | | 2012 |
Income before income taxes | | | $ 180,000 |
Income taxes | | | |
Current | $ 82,000 | | |
Future (Benefit) | (10,000) | | 72,000 |
Net Income | | | $ 108,000 |
| | | |
| | | 2013 |
Income before income taxes | | | $ 180,000 |
Income taxes | | | |
Current | $ 84,000 | | |
Future (Benefit) | (12,000) | | 72,000 |
Net Income | | | $ 108,000 |
(e) The net income is identical for 2012 and 2013. Although the temporary balances have changed, their changes were accrued at the expected future income tax rates in 2011. Subsequent reversals of balances in the temporary differences reduce the future tax liability account at the expected amounts each subsequent year.
This trend in net income is not a coincidence. The net income remains constant due to the consistent amount of income before income taxes.
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