Anthony Ltd. began business on January 1, 2011. At December 31, 2011, it had a $3,000 balance in the future tax liability account that pertains to property, plant, and equipment previously acquired at a cost of $1 million. The tax basis of these assets at December 31, 2011, was $940,000; the accounting basis was $950,000. Anthony's income before taxes for 2012 was $80,000. Anthony Ltd. follows the PE GAAP future income taxes method.
The following items caused
the only differences between accounting income before income taxes and taxable
income in 2012:
1. In 2012, the company paid
$75,000 for rent; of this amount, $25,000 was expensed in 2012. The other
$50,000 will be expensed equally over the year 2013 and 2014 accounting periods.
The full $75,000 was deducted for tax purposes in 2012.
2. Anthony Ltd. pays $12,000
a year for a membership in a local golf club for the company's
president.
3. Anthony Ltd. now offers a
one-year warranty on all its merchandise sold. Warranty expenses for 2012 were
$12,000. Cash payments in 2012 for warranty repairs were
$6,000.
4. Meals and entertainment
expenses (only 50% of which are ever tax deductible) were $16,000 for
2012.
5. Depreciation expense was
$50,000 and CCA was $55,000 for 2012. No new assets were acquired in the year,
and there were no asset disposals.
Income tax rates have not
changed over the past five years.
Instructions
(a) Calculate the balance in
the Future Income Tax Asset/Liability account at December 31,
2012.
(b) Calculate income taxes
payable for 2012.
(c) Prepare the journal
entries to record income taxes for 2012.
(d) Prepare the income tax
expense section of the income statement for 2012, beginning with the line
"Income before income taxes."
(e) Indicate how future
income taxes should be presented on the December 31, 2012 balance
sheet.
(f) How would your response
to (e) change if Anthony reported under IFRS?
(a)
Balance
|
|
|
Deductible |
Tax |
Future |
(PE
GAAP) |
Sheet |
|
|
(Taxable) |
Rate |
Tax |
Current |
Account |
Carrying |
Tax |
Temporary |
(see |
Asset |
or
Long- |
Dec.
31, 2012 |
Amount |
Basis |
Differences |
below) |
(Liability) |
Term |
Property, plant &
equip. |
$900,000* |
$885,000** |
($15,000) |
30% |
($4,500) |
LT |
Prepaid
Rent (2013 expense) |
25,000 |
-0- |
(25,000) |
30% |
(7,500) |
C |
Prepaid
Rent (2014 expense) |
25,000 |
-0- |
(25,000) |
30% |
(7,500) |
LT |
Warranty Liability |
6,000 |
-0- |
6,000 |
30% |
1,800 |
C |
Future
income tax liability, December 31, 2012 |
(17,700) |
| ||||
Future income tax liability before adjustment |
(3,000) |
| ||||
Incr.
in future income tax liability and future income tax expense for
2012 |
($14,700) |
|
* ($950,000 – $50,000 =
$900,000)
** ($940,000 – $55,000 =
$885,000)
Taxable temporary
difference, Dec. 31, 2011 X tax rate = Future tax liability, Dec. 31,
2011
($950,000 – $940,000) X tax
rate = $3,000
Tax rate =
30%
(b)
Accounting
income $80,000
Permanent
differences:
50% of meals expense
($16,000 X 50%) $8,000
Golf Club fees
12,000 20,000
100,000
Reversing
differences:
Depreciation 50,000
Capital cost
allowance (55,000) (5,000 )
Rent
paid (75,000)
Rent
expense 25,000 (50,000)
Warranty
expense 12,000
Warranty
payments (6,000) 6,000
Taxable
income $51,000
Current income taxes –
30% $15,300
(c) Current Income Tax
Expense....... 15,300
Income Tax
Payable............. 15,300
Future Income Tax
Expense.......... 14,700
Future Income Tax
Liability.... 14,700
(d)
Income before income
taxes $80,000
Income taxes
Current $15,300
Future 14,700 30,000
Net
income $50,000
(e)
Balance sheet, December 31,
2012
Current
liabilities:
Future tax liabilities:
($7,500 – $1,800) $5,700
Non-current
liabilities:
Future tax liability ($7,500
+ $4,500) 12,000
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.
(f)
Balance sheet, December 31,
2012
Non-current
liabilities:
Future tax liability
($12,000 + $5,700) $17,700
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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