Full Test Bank Chapter 18 Income Taxes - Test Bank Intermediate Accounting v2 13e | Canada by Donald E. Kieso. DOCX document preview.
CHAPTER 18
INCOME TAXES
CHAPTER STUDY OBJECTIVES
1. Understand the importance of income taxes from a business perspective. When a company decides where to set up its operations, a major consideration is the tax rate that it will face on its profits. The fact that corporate taxes can slow growth may help to explain why governments in Canada have steadily reduced corporate tax rates over time. For example, the combined federal and provincial tax rate declined from an average of approximately 43% to approximately 26.5% between 2000 and 2021.
2. Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Accounting income is calculated in accordance with generally accepted accounting principles. Taxable income is calculated in accordance with prescribed tax legislation and regulations. Because tax legislation and GAAP have different objectives, accounting income and taxable income often differ. To calculate taxable income, companies start with their accounting income and then add and deduct items to adjust the GAAP measure of income to what is actually taxable and tax deductible in the period. Current tax expense and income taxes payable are determined by applying the current tax rate to taxable income.
3. Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. A taxable temporary difference is the difference between the carrying amount of an asset or liability and its tax base with the consequence that, when the asset is recovered or the liability is settled in the future for an amount equal to its carrying value, the taxable income of that future period will be increased. Because taxes increase in the future as a result of temporary differences that exist at the SFP date, the future tax consequences of these taxable amounts are recognized in the current period as a deferred tax liability.
A deductible temporary difference is the difference between the carrying amount of an asset or liability and its tax base with the consequence that, when the asset is recovered or the liability is settled in the future for an amount equal to its book value, the taxable income of that future period will be reduced. Because taxes are reduced in the future as a result of temporary differences that exist at the SFP date, the future tax consequences of these deductible amounts are recognized in the current period as a deferred tax asset.
4. Prepare analyses of deferred tax balances and record deferred tax expense. The following steps are taken: (1) identify all temporary differences between the carrying amounts and tax bases of assets and liabilities at the SFP date; (2) calculate the correct net deferred tax asset or liability balance at the end of the period; (3) compare the balance in the deferred tax asset or liability before the adjustment with the correct balance at the SFP date—the difference is the deferred tax expense/benefit; and (4) make the journal entry, which is based on the change in the amount of the net deferred tax asset or liability.
5. Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Tax rates other than the existing rates can be used only when the future tax rates have been enacted into legislation or substantively enacted. Deferred tax assets and liabilities are measured at the tax rate that applies to the specific future years in which the temporary difference is expected to reverse. When there is a change in the future tax rate, its effect on the future tax accounts is recognized immediately. The effects are reported as an adjustment to deferred tax expense in the period of the change.
6. Account for tax loss carryover benefits, including any note disclosures. A company may carry a taxable loss back three years and receive refunds to a maximum of the income taxes paid in those years. Because the economic benefits related to the losses carried back are certain, they are recognized in the period of the loss as a tax benefit on the income statement and as an asset (income tax receivable) on the balance sheet.
A post-2005 tax loss can be carried forward and applied against the taxable incomes of the next 20 years. If the economic benefits related to the tax loss are more likely than not to be realized during the carryforward period, they are recognized in the period of the loss as a deferred tax benefit in the income statement and as a deferred tax asset on the SFP. Otherwise, they are not recognized in the financial statements. Alternatively, ASPE also allows the use of a contra valuation allowance account, but this approach is not used under IFRS. Disclosure is required of the amounts of tax loss carryforwards and their expiry dates. If previously unrecorded tax losses are subsequently used to benefit a future period, the benefit is recognized in that future period.
7. Explain why the Deferred/Future Tax Asset account is reassessed at the statement of financial date, and account for the deferred tax asset with and without a valuation allowance account. Every asset must be assessed to ensure that it is not reported at an amount higher than the economic benefits that are expected to be received from the use or sale of the asset. The economic benefit to be received from the deferred tax asset is a reduction in taxes payable in future years. If it is unlikely that sufficient taxable income will be generated in the future to allow the future deductions, the income tax asset may have to be written down. If previously unrecognized amounts are now expected to be realizable, a deferred tax asset and a deferred tax benefit would be recognized.
8. Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Under all methods, current income taxes payable or receivable are reported separately as a current liability or current asset. Under IFRS, the deferred tax accounts are all classified as non-current. Current and deferred tax expense is reported separately with income before discontinued operations, discontinued operations, items in OCI, retained earnings, and other capital. Separate disclosure is required of the amounts and expiry dates of unused tax losses, and the amount of deductible temporary differences for which no deferred tax asset has been recognized. Under ASPE and assuming a single tax authority, future income tax assets and liabilities are classified as one net non-current amount. ASPE calls for limited disclosures, but under IFRS, additional disclosures are required about temporary differences and unused tax losses, the major components of income tax expense, and the reasons for the difference between the statutory tax rate and the effective tax rate. Analytics can help assess earnings quality.
9. Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. ASPE allows an accounting policy choice—either the taxes payable method or the future income taxes method—while IFRS requires use of the temporary difference approach (a method consistent with the future income taxes method). The main differences relate to terminology, the SFP classification of deferred/future tax assets and liabilities, use of a valuation allowance, and the extent of disclosure. The Looking Ahead section summarizes some recent developments.
10. Apply the temporary difference approach (future income taxes method) of accounting for income taxes in a comprehensive situation. In a comprehensive situation, take the following steps. (1) Calculate the current tax expense and payable. (2) Determine the taxable and deductible temporary differences as the difference between the carrying amounts and tax bases of the assets and liabilities; calculate the correct balance of the Deferred Tax Asset or Deferred Tax Liability account. (3) Determine the deferred tax expense as the adjustment needed to the existing SFP balance. (4) Make an adjusting entry to restate the deferred tax asset or liability amounts if a change in the future tax rates has been substantively enacted. (5) Classify the net deferred/future tax asset or liability according to the accounting standards being applied.
Answer No. Description
c 1. Impact of corporate income taxes
c 2. Year-end adjustments for income tax purposes
d 3. ASPE income tax methods allowed
b 4. IFRS terminology
c 5. Differences between taxable income and accounting income
c 6. IFRS income tax methods allowed
d 7. Identify reversible difference
b 8. Definition of a temporary difference
c 9. Identify a permanent difference
a 10. Calculate a permanent difference
b 11. Identify incorrect statement
d 12. Calculate CCA claimed
b 13. Calculate current income tax payable
a 14. Calculate instalment accounts receivable
a 15. Calculate current income tax liability
d 16. Calculate current income tax liability
b 17. Calculate current income tax expense
a 18. Temporary differences
c 19. Permanent differences
c 20. Calculate deferred tax liability and current income taxes payable
a 21. Deferred tax liability from instalment sales
a 22. Deferred tax liability from depreciation and warranty differences
c 23. Deferred tax asset from warranty expenses
a 24. Definition of the tax base of a liability
c 25. Income tax expense—IFRS
d 26. Calculate future/deferred tax liability
a 27. Depreciation and temporary differences
d 28. Definition of deferred tax liability
a 29. Composition of total income tax expense
b 30. Difference due to unrealized loss on short-term securities
c 31. Definition of deferred tax asset
c 32. Adjusting entry to credit deferred tax asset account
a 33. Calculate deferred tax liability
d 34. Calculate deferred tax liability with changing tax rates
d 35. Calculate deferred tax liability
a 36. Calculate income tax expense for the year
a 37. Calculate deferred tax liability
c 38. Deferred tax liability from reversible and permanent differences
d 39. Deferred tax liability when using equity method of accounting
b 40. Calculate deferred tax asset
c 41. Calculate deferred tax asset
b 42. Calculate deferred tax asset or liability
d 43. Calculate deferred tax asset or liability
Answer No. Description
d 44. Deferred tax liability
a 45. Adjust tax liability with changing tax rates
a 46. Objective of interperiod tax allocation
a 47. Result of interperiod tax allocation
d 48. Income tax allocation
b 49. Calculation of effective tax rate
b 50. Differences between taxable and accounting income
a 51. Definition of intraperiod tax allocation
c 52. Appropriate tax rate for deferred tax amounts
b 53. Change of tax rate on future income tax assets/liabilities
b 54. Recognition of tax benefits of a loss carryforward
d 55. Financial statement presentation of a tax benefit from loss carryback
c 56. Loss carryforward benefits
c 57. Tax loss tax benefits
a 58. Tax losses
c 59. Deferred Tax Asset account under IFRS and ASPE
d 60. Appropriate use of the Deferred Tax Asset account
b 61. Calculate tax recovery of a loss carryback
b 62. Calculate loss to be reported after loss carryback
c 63. Calculate deferred taxes on loss carryforward
c 64. Calculate loss to be reported after loss carryback
d 65. Calculate income tax refund following a loss carryback
b 66. Calculate loss to be reported after loss carryforward
b 67. IFRS SFP presentation of deferred tax assets and liabilities
a 68. IFRS and IAS 12
Exercises
Item Description
E18-69 Taxable income vs. accounting and taxes payable under IFRS and ASPE
E18-70 Permanent and reversible differences
E18-71 Permanent and reversible differences
E18-72 Reversible differences
E18-73 Calculate taxable income
E18-74 Calculate future income taxes
E18-75 Permanent and reversible differences and disclosure
E18-76 Temporary differences, deferred tax liabilities, and deferred tax assets
E18-77 Calculate deferred income taxes
E18-78 Calculate change in tax rates
E18-79 Calculate change in tax rates, and disclosure
E18-80 Calculate and journalize taxable loss carryforward without valuation allowance (IFRS)
E18-81 Calculate and journalize taxable loss carryforward with valuation allowance (ASPE)
E18-82 Presentation of deferred tax assets and liabilities
E18-83 Intra period presentation
E18-84 Calculate taxes under the taxes payable method, and disclosure
E18-85 Comparing IFRS and ASPE for income tax purposes
Item Description
P18-86 Differences between accounting and taxable income and effect on future income taxes
P18-87 Multiple reversible differences
P18-88 Interperiod tax allocation with change in enacted tax rates
P18-89 Comprehensive income tax situation with multiple differences (ASPE)
P18-90 Comprehensive income tax situation with multiple differences and tax rates (IFRS)
P18-91 Deferred tax asset
P18-92 Loss carryover benefits
P18-93 Deferred tax asset and tax law
P18-94 Intraperiod tax allocation and disclosure
NOTE TO INSTRUCTOR: Except where ASPE is specifically noted, it is assumed that all questions are to be solved using current IFRS pronouncements.
MULTIPLE CHOICE QUESTIONS
1. Of the various taxation options available to OECD countries, those that had the most negative impact on gross domestic product were
a) property taxes.
b) consumption taxes.
c) corporate taxes.
d) personal income taxes.
Difficulty: Easy
Learning Objective: Understand the importance of income taxes from a business perspective.
Section Reference: Income Taxes from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. Under IFRS, end-of-year adjustments may need to be made to income for all of the following reasons, except
a) income taxes must be filed in accordance with the Income Tax Act.
b) IFRS does not provide guidance on allowable deductions for the CRA.
c) IFRS allows for the taxes payable approach.
d) income tax preparation may also be subject to provincial legislation.
Difficulty: Easy
Learning Objective: Understand the importance of income taxes from a business perspective.
Section Reference: Income Taxes from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. For calculating income tax expense, ASPE allows the use of
a) any method as long as the CRA approves it.
b) the taxes payable method only.
c) the future income taxes method only.
d) either the taxes payable method or the future income taxes method.
Difficulty: Easy
Learning Objective: Understand the importance of income taxes from a business perspective.
Section Reference: Income Taxes from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. Under IFRS, accounting income and taxable income are referred to as
Accounting Income Taxable Income
a) Accounting profit Income for tax purposes
b) Accounting profit Taxable profit
c) Income before taxes Taxable profit
d) Pre-tax profit Taxable income
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
5. When calculating income tax expense, taxable income of a corporation differs from pre-tax accounting income because of
Permanent Reversible
Differences Differences
a) no no
b) no yes
c) yes yes
d) yes no
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. For calculating income tax expense, IFRS requires the use of
a) any method as long as the CRA approves it.
b) the taxes payable method only.
c) the temporary difference approach only.
d) either the taxes payable method or the temporary difference approach.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
7. Which of the following will NOT result in a reversible difference?
a) product warranty liabilities
b) unrealized holding losses
c) instalment sales
d) fines and penalties
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. The difference between the tax base of an asset or liability and its reported amount on the SFP is called a
a) permanent difference.
b) temporary difference.
c) current difference.
d) future tax expense.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
9. Alabama Corp.'s taxable income differed from its accounting income for 2023. An item that would create a permanent difference in accounting and taxable incomes for the corporation would be
a) a balance in the Unearned Rent account at year end.
b) using CCA for tax purposes and straight-line depreciation for book purposes.
c) a payment of the golf club dues for the president’s membership.
d) making instalment sales during the year.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
10. Alabama Corp.'s taxable income differed from its accounting income for 2023. Accounting income includes an expense of $25,000 under meals and entertainment expense, with $3,000 of that total being spent on golf dues. What is the permanent and temporary difference respectively for Alabama?
a) Permanent $14,000 / Temporary $0
b) Permanent $11,000 / Temporary $3,000
c) Permanent $0 / Temporary $14,000
d) Permanent $3,000 / Temporary $12,500.
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (($25,000 – $3,000) / 2) + $3,000 = $14,000
11. With regard to reconciling income reported on the financial statements to taxable income, which of the following statements is INCORRECT?
a) All differences between accounting income and taxable income are considered.
b) Only reversible differences are considered.
c) Only those that result in temporary differences are considered when determining deferred tax amounts for the SFP.
d) Permanent differences may be added back to or deducted from accounting income.
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
12. Columbia Corp.'s partial income statement for its first year of operations is as follows:
Income before income taxes $1,750,000
Income tax expense
Current $483,000
Deferred 42,000 525,000
Net income $1,225,000
Columbia uses straight-line depreciation for financial reporting purposes and CCA for tax purposes. The depreciation expense for the year was $700,000. Except for depreciation, there were no other differences between accounting income and taxable income. Assuming a 30% tax rate, what amount was claimed for CCA on the corporation's tax return for the year?
a) $560,000
b) $665,000
c) $700,000
d) $840,000
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 30% × Temporary Difference = $42,000;
Temporary Difference = $42,000 ÷ 30% = $140,000;
$700,000 + $140,000 = $840,000
13. At the end of 2023, its first year of operations, Kali Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:
Pre-tax accounting income $800,000
Estimated lawsuit expense 400,000
Excess CCA for tax purposes (900,000)
Taxable income $300,000
The estimated lawsuit expense of $400,000 will be deductible in 2024 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Kali adheres to IFRS requirements. The current income tax payable is
a) $0.
b) $75,000.
c) $150,000.
d) $200,000.
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $300,000 × 25% = $75,000
14. Macintyre Inc. sells household furniture on an instalment basis. Customers make payments in equal monthly instalments over a two-year period, with no down payment required. Macintyre's gross profit on instalment sales is 40% of the selling price.
For book purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the instalment method is used. There are no other accounting and income tax accounting differences, and Macintyre's income tax rate is 30%.
If Macintyre's December 31, 2023, SFP includes a deferred tax liability of $90,000 arising from the difference between accounting and tax treatment of the instalment sales, it should also include instalment accounts receivable of
a) $750,000.
b) $300,000.
c) $225,000.
d) $90,000.
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $90,000 ÷ 30% = $300,000 temporary difference
$300,000 ÷ 40% = $750,000
15. Bare Fashions Corp. reported pre-tax accounting income of $300,000 for calendar 2023. To calculate the income tax liability, the following data were considered:
Life insurance proceeds received on the death of the CEO $130,000
CCA in excess of depreciation 20,000
Instalment tax payments made during 2023 25,000
Enacted income tax rate for 2023 30%
What amount should Bare Fashions report as its current income tax liability on its December 31, 2023 SFP?
a) $20,000
b) $26,000
c) $45,000
d) $51,000
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($300,000 – $130,000 – $20,000) × 30% = $45,000;
$45,000 – $25,000 = $20,000
16. Shierling Ltd. reported pre-tax accounting income of $750,000 for calendar 2023. To calculate the income tax liability, the following data were considered:
Non-taxable portion of capital gains $ 30,000
CCA in excess of depreciation 60,000
Instalment tax payments made during 2023 150,000
Enacted income tax rate for 2023 30%
What amount should Shierling report as its current income tax liability on its December 31, 2023 SFP?
a) $198,000
b) $75,000
c) $66,000
d) $48,000
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($750,000 – $30,000 – $60,000) × 30% = $198,000;
$198,000 – $150,000 = $48,000
17. For calendar 2023, Peanuts Corp. prepared the following reconciliation of accounting income to taxable income:
Pre-tax accounting income $750,000
Add reversible difference
Construction contract revenue, which will reverse in 2024 100,000
Deduct reversible difference
Depreciation expense, which will reverse in equal amounts in
each of the next four years (400,000)
Taxable income $450,000
Peanut’s income tax rate is 25% for 2023. What amount should the corporation report in its 2023 income statement as current income tax expense?
a) $25,000
b) $112,500
c) $187,500
d) $212,500
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $450,000 × 25% = $112,500
18. All the following are examples of temporary differences that result in taxable deductible amounts in future years, except for
a) warranty costs paid.
b) holding losses.
c) warranty costs accrued.
d) pension costs accrued.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
19. Which of the following is NOT a permanent difference?
a) interest paid on fines for breaking a law
b) the 50% non-deductible portion of meals and entertainment
c) litigation accruals
d) proceeds from life insurance carried on key officers
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
20. For calendar 2023, its first year of operations, Lion Ltd. reported pre-tax accounting income of $100,000. Lion uses CCA for tax purposes and straight-line depreciation for financial reporting. The differences between depreciation and CCA over the five-year life of their assets, and the enacted tax rates for 2023 to 2027 are as follows:
Depreciation
Over (Under) CCA Tax Rate
2023 $(20,000) 35%
2024 (26,000) 30%
2025 (6,000) 30%
2026 24,000 30%
2027 28,000 30%
There are no other reversible differences. On Lion's December 31, 2023 SFP, the deferred tax liability and the current income taxes payable should be
Deferred Current Income
Tax Liability Taxes Payable
a) $7,000 $28,000
b) $5,600 $28,000
c) $6,000 $28,000
d) $6,000 $24,000
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $20,000 × 30% = $6,000; ($100,000 – $20,000) × 35% = $28,000
21. Casey Inc. uses the accrual method of accounting for financial reporting purposes and the instalment method of accounting for income tax purposes. Instalment income of $930,000 will be collected in the following years when the enacted tax rates are:
Collection of Income Enacted Tax Rates
2023 $120,000 35%
2024 180,000 30%
2025 270,000 30%
2026 360,000 25%
The instalment income is Casey's only reversible difference. What amount should be included as the deferred tax liability on its December 31, 2023 SFP?
a) $225,000
b) $243,000
c) $256,500
d) $315,000
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($180,000 × 30%) + ($270,000 × 30%) + ($360,000 × 25%) = $225,000
22. For calendar 2023, Melvin Corp. reported depreciation expense of $800,000 on its income statement, but on its 2023 income tax return, Melvin claimed CCA of $1,200,000. The 2023 income statement also included $150,000 in accrued warranty expense that will be deducted for tax purposes when paid. Melvin's income tax rates are 30% for 2023 and 2024, and 24% for 2025 and 2026. The depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2024 $160,000 $ 30,000
2025 140,000 50,000
2026 100,000 70,000
$400,000 $150,000
These were Melvin's only reversible differences. At December 31, 2023, Melvin’s deferred tax liability should be
a) $67,800.
b) $73,200.
c) $75,000.
d) $133,800.
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($160,000 – $30,000) × 30% = $39,000; ($140,000 – $50,000) × 24% = $21,600; ($100,000 – $70,000) × 24% = $7,200; $39,000 + $21,600 + $7,200 = $67,800
23. For calendar 2023, its first year of operations, Snow Corp. reported pre-tax accounting income of $330,000 and taxable income of $600,000. The only reversible difference is accrued warranty costs, which are expected to be paid as follows:
2024 $90,000
2025 45,000
2026 45,000
2027 90,000
The enacted income tax rates are 35% for 2023, 30% for 2024, 2025, and 2026, and 25% for 2027. The deferred tax asset reported on Snow’s December 31, 2023 SFP should be
a) $54,000.
b) $63,000.
c) $76,500.
d) $94,500.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($90,000 + $45,000 + $45,000) × 30% = $54,000; $90,000 × 25% = $22,500;
$54,000 + $22,500 = $76,500
24. The tax base of a liability is its carrying amount on the SFP
a) reduced by any amount that will be deductible for tax purposes in future periods.
b) increased by any amount that will be deductible for tax purposes in future periods.
c) less any amount that will not be taxable in the future.
d) plus any amount that will not be taxable in the future.
Difficulty: Easy
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred/Future Income Taxes
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
25. Under IFRS, income tax expense is calculated as current tax expense
a) less an increase in a deferred tax liability.
b) less a decrease in a deferred tax asset.
c) plus or minus the change in deferred taxes.
d) plus or minus the change in the provision for income taxes.
Difficulty: Easy
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
26. Hunter Limited is a commercial construction company that takes on long-term building projects. The company uses accounting practices that recognize revenue faster than the Income Tax Act requires. In 2023, Hunter recognized $350,000 of revenue on its books that is NOT taxable until 2024. What is the impact to the statement of financial position based on a 20% enacted tax rate?
a) Deferred Tax Asset $70,000
b) Deferred Tax Benefit $70,000
c) Deferred Tax Expense $70,000
d) Deferred Tax Liability $70,000
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Future taxable temporary difference is $350,000 x 20% = $70,000
27. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in
Taxable Temporary Deductible Temporary
Differences Differences
a) yes yes
b) yes no
c) no yes
d) no no
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
28. A deferred tax liability is the
a) current tax consequence of a taxable temporary difference.
b) current tax consequence of a deductible temporary difference.
c) future tax consequence of a deductible temporary difference.
d) future tax consequence of a taxable temporary difference.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
29. Total income tax expense for a corporation consists of
a) current tax expense and deferred tax expense.
b) current tax expense only.
c) deferred tax expense only.
d) the deferred tax asset minus any deferred tax liability.
Difficulty: Easy
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
30. A corporation records an unrealized loss on FV-NI investments. This would result in what type of difference and in what type of deferred tax account?
Type of Difference Deferred tax
a) Reversible Liability
b) Reversible Asset
c) Permanent Liability
d) Permanent Asset
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
31. A deferred tax asset is the
a) current tax consequence of a taxable temporary difference.
b) current tax consequence of a deductible temporary difference.
c) future tax consequence of a deductible temporary difference.
d) future tax consequence of a taxable temporary difference.
Difficulty: Easy
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
32. If a corporation prepares an adjusting entry to credit the deferred tax asset account, this should represent
a) additional future income taxes payable.
b) a transfer to the deferred tax liability account.
c) the reversal of a deferred tax benefit that originated in a prior year.
d) the reversal of a deferred tax expense that originated in a prior year.
Difficulty: Easy
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
33. On January 2, 2022, Brunswick Corp. purchased a depreciable asset for $600,000. The asset has an estimated 4-year life with no residual value. Straight-line depreciation is being used for financial statement purposes but the following CCA amounts will be deducted for tax purposes:
2022 $150,000 2025 $56,250
2023 225,000 2026 28,125
2024 112,500 2027 28,125
Assuming an income tax rate of 30% for all years, the deferred tax liability that should be reflected on Brunswick's SFP at December 31, 2023, should be
a) $22,500.
b) $33,750.
c) $45,000.
d) $50,625.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($600,000 – $150,000 – $150,000) – ($600,000 – $150,000 – $225,000) = – $75,000
$75,000 × 30% = $22,500
34. A reconciliation of Quebec Corp.'s pre-tax accounting income with its taxable income for 2023, its first year of operations, is as follows:
Pre-tax accounting income $3,000,000
Excess CCA (90,000)
Taxable income $2,910,000
The excess CCA will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2023, 35% in 2024, and 30% in both 2025 and 2026. The total deferred tax liability to be reported on Quebec's SFP at December 31, 2023 is
a) $36,000.
b) $31,500.
c) $30,000.
d) $28,500.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($30,000 × 35%) + ($30,000 × 30%) + ($30,000 × 30%) = $28,500
35. At the end of 2023, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:
Pre-tax accounting income $300,000
Estimated lawsuit expense 750,000
Instalment sales (600,000)
Taxable income $450,000
The estimated lawsuit expense of $750,000 will be deductible in 2025 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The net deferred tax asset to be recorded is
a) $180,000.
b) $90,000.
c) $67,500.
d) $45,000.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($750,000 – $600,000) × 30% = $180,000
36. At the end of 2023, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:
Pre-tax accounting income $300,000
Estimated lawsuit expense 750,000
Instalment sales (600,000)
Taxable income $450,000
The estimated lawsuit expense of $750,000 will be deductible in 2025 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The total income tax expense to be reported on the income statement is
a) $90,000.
b) $135,000.
c) $150,000.
d) $300,000.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Income tax payable = $450,000 × 30% = $135,000
Change in deferred tax asset = ($750,000 – $600,000) × 30% = $45,000
$135,000 – $45,000 = $90,000
37. At the end of 2023, its first year of operations, Halifax Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:
Pre-tax accounting income $800,000
Estimated lawsuit expense 400,000
Excess CCA for tax purposes (900,000)
Taxable income $300,000
The estimated lawsuit expense of $400,000 will be deductible in 2024 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Halifax adheres to IFRS requirements. The net deferred tax liability to be recorded is
a) $125,000.
b) $200,000.
c) $100,000.
d) $0.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($900,000 – $400,000) × 25% = $125,000
38. In its 2023 income statement, its first year of operations, Penelope Corp. reported depreciation of $525,000 and dividend revenue from a Canadian corporation of $105,000. For 2023 income tax purposes, Penelope claimed CCA of $825,000. The difference in depreciation/CCA will reverse in equal amounts over the next three years. Penelope's income tax rates are 35% for 2023, 30% for 2024, and 25% for both 2025 and 2026. What amount should be included as the deferred tax liability on Penelope's December 31, 2023 SFP?
a) $99,000
b) $90,000
c) $80,000
d) $75,000
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $825,000 – $525,000 = $300,000; ($100,000 × 30%) + ($100,000 × 25%) + ($100,000 × 25%) = $80,000
39. On January 1, 2023, Lake Corp., a publicly accountable enterprise, purchased 40% of the common shares of Michigan Inc. and accounts for this investment by the equity method. During 2023, Michigan reported earnings of $900,000 and paid dividends of $300,000. Assume that these dividends are taxable to Lake when received. Lake assumes that all of Michigan's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 20%. Lake's current income tax rate is 25%. The increase in Lake's deferred tax liability for this temporary difference is
a) $120,000.
b) $100,000.
c) $60,000.
d) $48,000.
Difficulty: Hard
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($900,000 – $300,000) × 40% = $240,000 (earnings from associate, not income for tax purposes); $240,000 × 20% = $48,000
40. At the end of 2023, its first year of operations, Rinaldo Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:
Pre-tax accounting income $300,000
Estimated lawsuit expense 600,000
Instalment sales (750,000)
Taxable income $150,000
The estimated lawsuit expense of $600,000 will be deductible in 2025 when it is expected to be paid. The instalment sales will be realized at $375,000 in each of the next two years. The income tax rate is 30% for all years. The net deferred tax liability to be recorded is
a) $0.
b) $45,000.
c) $90,000.
d) $225,000.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $$750,000 – $600,000) × 30% = $45,000
41. At the end of 2023, its first year of operations, Gaucho Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:
Pre-tax accounting income $800,000
Estimated lawsuit expense 900,000
Excess CCA for tax purposes (400,000)
Taxable income $1,300,000
The estimated lawsuit expense of $900,000 will be deductible in 2024 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $100,000 in each of the next four years. The income tax rate is 25% for all years. Gaucho adheres to IFRS requirements. The net deferred tax asset to be recorded is
a) $200,000.
b) $160,000.
c) $125,000.
d) $60,000.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $900,000 – $400,000) × 25% = $125,000
42. Gretna Corp. reported the following results for calendar 2023, its first year of operations:
Pre-tax accounting income $250,000
Taxable income 400,000
The difference between accounting income and taxable income is due to a temporary difference, which will reverse in 2024. Assuming that the enacted tax rates in effect are 30% in 2023 and 25% in 2024, what amount should Gretna record as the deferred tax asset or liability for calendar 2023?
a) $45,000 deferred tax liability
b) $37,500 deferred tax asset
c) $45,000 deferred tax asset
d) $37,500 deferred tax liability
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($400,000 – $250,000) × 25% = $37,500
43. In 2023, Savoury Ltd. accrued, for book purposes, estimated losses on disposal of unused plant facilities of $750,000. The facilities were sold in March 2024 and a $750,000 loss was recognized for tax purposes. Also, in 2023, Savoury paid $50,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 25% in both 2023 and 2024, and that Savoury paid $390,000 in income taxes in 2023, the amount reported as the deferred tax asset or liability on Savoury's SFP at December 31, 2023, should be a
a) Cannot be determined from the information given.
b) $175,000 asset.
c) $187,500 liability.
d) $187,500 asset.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $750,000 × 25% = $187,500
44. Devlin Ltd. reports a deferred tax liability in its 2023 financial statements. This implies that Devlin
a) likely reported net income for the 2023 year.
b) is a private corporation.
c) is a public corporation.
d) can be a public or a private corporation.
Difficulty: Easy
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
45. Quebec Corp. currently has a deferred tax liability on the statement of financial position in the amount of $400,000, which is based on a tax rate of 25% for 2023. The federal government has announced changes to the tax rate for 2024, increasing it to 28%. What is the journal entry to record this adjustment?
a) Dr. Deferred Tax Expense $48,000
Cr. Deferred Tax Liability $48,000
b) Dr. Deferred Tax Liability $48,000
Cr. Deferred Tax Expense $48,000
c) Dr. Deferred Tax Expense $448,000
Cr. Deferred Tax Liability $448,000
d) No entry required because the tax rate doesn’t affect Quebec Corp.’s financial statements.
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section Reference: Deferred Tax Liabilities
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: The taxable difference is equal to $400,000 / 25% = $1,600,000. The liability account should be adjusted to $1,600,000 x 28% = $448,000. Adjustment = $448,000 – $400,000 = $48,000
46. One objective of interperiod tax allocation is to
a) recognize the tax effects in the accounting period when the transactions and events are recognized for financial reporting purposes.
b) recognize a distribution of earnings to the shareholders.
c) reconcile the tax consequences of permanent and reversible differences appearing on the current year's financial statements.
d) adjust income tax expense on the income statement to be in agreement with income taxes payable on the SFP.
Difficulty: Medium
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
47. Interperiod tax allocation causes
a) the income tax expense reported on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.
b) the income tax expense reported on the income statement to bear a normal relation to the tax liability.
c) the income tax liability reported on the SFP to bear a normal relation to the income before tax reported on the income statement.
d) the income tax expense reported on the income statement to be presented with the specific revenues causing the tax.
Difficulty: Medium
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
48. Income tax expense should be allocated to all of the following, except
a) continuing operations.
b) discontinued operations.
c) prior period adjustments.
d) unusual or infrequent items.
Difficulty: Easy
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
49. The effective tax rate for a period is calculated by dividing
a) total income tax expense by taxable income.
b) total income tax expense by the pre-tax income on the income statement.
c) taxable income by total income tax expense.
d) taxable income by the pre-tax income on the income statement.
Difficulty: Easy
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
50. Taxable income of a corporation
a) differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.
b) differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
c) is based on generally accepted accounting principles.
d) is reported on the corporation's income statement.
Difficulty: Easy
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
51. Allocating income tax expense or benefit for the period (both current and deferred) to the income and other statements to reflect transactions that attract income tax is known as
a) intraperiod tax allocation.
b) interperiod tax allocation.
c) current tax allocation.
d) reconciliation approach.
Difficulty: Medium
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
Section Reference: Analyses of Temporary Deductible Differences
Bloomcode: Knowledge
AACSB: Analytic
52. Tax rates other than the current tax rate may be used to calculate the future income tax amount on the SFP if
a) it is probable that a future income tax rate change will occur.
b) it appears likely that a future income tax rate will be higher than the current tax rate.
c) the future income tax rates have been enacted or substantively enacted into law.
d) it appears likely that a future income tax rate will be less than the current tax rate.
Difficulty: Easy
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
53. When a change in the tax rate is enacted, the effect on existing future income tax assets or liabilities is
a) recorded immediately as a retroactive adjustment to retained earnings.
b) recorded as an adjustment to income tax expense in the period of the rate change.
c) recorded prospectively over the number of years from the year of the change until the period in which the timing differences are expected to reverse.
d) not recognized until the benefit or cost of the rate change is realized when the timing differences actually reverse.
Difficulty: Easy
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
54. Recognition of tax benefits in a loss year due to a loss carryforward requires
a) the establishment of a deferred tax liability.
b) the establishment of a deferred tax asset.
c) the establishment of an income tax receivable.
d) only a note to the financial statements.
Difficulty: Easy
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
55. McMurray Ltd. incurred an accounting and taxable loss for 2023. The corporation therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2023 financial statements?
a) The reduction of the loss should be reported as an adjustment to retained earnings.
b) The refund claimed should be reported as a future charge and amortized over five years.
c) The refund claimed should be reported as revenue in the current year.
d) The refund claimed should be shown as a reduction of the loss in 2023.
Difficulty: Easy
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
56. Which of the following statements related to loss carrybacks and carryforwards is correct?
a) The benefit due to a loss carryback can be reported in both the loss year and future years.
b) The benefit due to a loss carryforward should always be reported in the loss year.
c) The benefit due to a loss carryforward could be reported in both the loss year and future years.
d) The benefit due to a loss carryback is reported only in the second year preceding the loss year.
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
57. A tax loss
a) must always be carried back 3 years.
b) must always be carried forward 10 years.
c) may be carried back 3 years or carried forward up to 20 years.
d) occurs whenever a company reports a net loss in their income statement.
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
58. What factors into the decision on how to use a tax loss?
a) past and future anticipated tax rates
b) the results of industry competitors
c) different tax rates across nations
d) All of the choices are correct.
Difficulty: Easy
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
59. Recognizing a deferred tax asset for most deductible temporary differences and carryforward of unused tax losses is
a) used under IFRS only.
b) used under ASPE only.
c) used only to the extent that it is probable and the deferred tax asset will be realized.
d) used only for corporate income tax purposes for the CRA.
Difficulty: Easy
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
60. The use of a Deferred Tax Asset account is subject to all of the following restrictions, except
a) if the future taxable income is not probable, the Deferred Tax Asset account will be removed.
b) the deferred Tax Asset account is regularly reviewed.
c) when conditions change, a previously unrecognized Deferred Tax Asset account may be recognized.
d) the allowance method for recognizing the Deferred Tax Asset account is the required standard.
Difficulty: Easy
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
61. Sassy Inc. reported a taxable and accounting loss of $130,000 for 2023. Its pre-tax accounting income for the preceding two years was as follows:
2021 $60,000
2022 80,000
Assuming that management wants to use the losses to carryback and recover previous income taxes paid, how much will Sassy receive as a refund based on a 25% tax rate for all years involved?
a) $20,000
b) $32,500
c) $35,000
d) $130,000
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Loss of $130,000 x 25% = $32,500
62. Saucy Inc. reported a taxable and accounting loss of $130,000 for 2023. Its pre-tax accounting income for the preceding two years was as follows:
2021 $60,000
2022 80,000
The amount that Saucy reports as a net loss for financial reporting purposes in 2023, assuming that it uses the carryback provisions, and that the tax rate is 25% for all years involved, is
a) $0.
b) $97,500.
c) $105,000.
d) $130,000.
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $130,000 – (25% × $130,000) = $97,500.
63. Sassy Inc. reported a taxable and accounting loss of $130,000 for 2023. Its pre-tax accounting income for the preceding two years was as follows:
2021 $60,000
2022 $80,000
Assuming that management wants to use the losses to carryforward and offset against future income, what will be the impact to the 2023 financial statements if future tax rates are increasing to 28%?
a) Deferred Tax Benefit $39,200
b) Deferred Tax Expense $39,200
c) Deferred Tax Asset $36,400
d) Deferred Tax Expense $36,400
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Loss of $130,000 x 28% = $36,400
64. Hopper Corporation reported the following results for its first three years of operations:
2022 income (before income taxes) $ 40,000
2023 loss (before income taxes) (360,000)
2024 income (before income taxes) 400,000
There were no permanent or reversible differences during these three years. Assume an income tax rate of 30% for 2022 and 2023, and 40% for 2024, and that any deferred tax asset recognized is more likely than NOT to be realized. If Hopper elects to use the carryback provisions, what income (loss) is reported for 2023?
a) $(360,000)
b) $(348,000)
c) $(220,000)
d) $0
Difficulty: Hard
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $40,000 × 30% = $12,000; $320,000 × 40% = $128,000;
$360,000 – $12,000 – $128,000 = $220,000
65. Night Owl Inc. reports a taxable and pre-tax accounting loss of $150,000 for 2023. The corporation's taxable and pre-tax accounting income and tax rates for the preceding two years were:
2021 $200,000 20%
2022 200,000 20%
The 2023 tax rate is 30%. If Night Owl elects to use the carryback provisions, the amount that should be reported as income tax receivable for 2023 is
a) $50,000.
b) $45,000.
c) $35,000.
d) $30,000.
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $150,000 × 20% = $30,000
66. Colombe Properties Corporation reported the following results for its first three years of operations:
2022 income (before income taxes) $ 40,000
2023 loss (before income taxes) (360,000)
2024 income (before income taxes) 400,000
There were no permanent or reversible differences during these three years. Assume an income tax rate of 30% for 2022 and 2023, and 40% for 2024, and that any deferred tax asset recognized is more likely than NOT to be realized. If Colombe Properties elects to use the carryforward provisions and NOT the carryback provisions, what income (loss) is reported for 2023?
a) $0
b) $(216,000)
c) $(232,000)
d) $(360,000)
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryforward Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $360,000 × 40% = $144,000; $360,000 – $144,000 = $216,000
67. Under IFRS, how are deferred tax asset and liability accounts presented on the SFP?
a) They must be segregated into current and non-current items.
b) They must be shown as non-current assets or liabilities.
c) They must be shown as current assets or liabilities.
d) They must be reported as a reduction of the related asset or liability accounts.
Difficulty: Easy
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, apply intraperiod tax allocation, and discuss analytics.
Section Reference: Statement of Financial Position Presentation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
68. Using IFRS, IAS 12 guidelines allow for all of the following, except
a) the choice of using either the taxes payable method or the future income taxes method.
b) the use of the temporary difference approach.
c) it does not use a valuation account.
d) it permits the use of a Deferred Tax Asset account to the extent that it is probable that it will be realized.
Difficulty: Easy
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
EXERCISES
Ex 18-69 Taxable income vs. accounting income and taxes payable under IFRS and ASPE
Explain the difference between accounting income and taxable income. How do these differences impact income under IFRS between what is and what is not allowable for income tax purposes? Are there any differences under ASPE?
Solution18-69
Accounting income is calculated in accordance with generally accepted accounting principles. Taxable income is calculated in accordance with prescribed tax legislation and regulations. Because tax legislation and GAAP have different objectives, accounting income and taxable income almost always differ. Corporations file income tax returns following the Income Tax Act (and related provincial legislation), which is administered by the CRA. IFRS differs in several ways from tax regulations and as a result, adjustments need to be made on the income reported on the financial statements when determining taxable income. Pre-tax income on the income statement and taxable income are generally different under IFRS and ASPE. However, under ASPE, companies have the option of using the taxes payable approach where income tax expense would typically equal income taxes payable.
Difficulty: Easy
Learning Objective: Understand the importance of income taxes from a business perspective.
Section Reference: Income Taxes from a Business Perspective
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 18-70 Permanent and reversible differences
Explain whether each of the following independent situations should be treated as a reversible difference or a permanent difference.
1. For accounting purposes, Barley Corp. reports revenue from instalment sales on the accrual basis. For income tax purposes it reports the revenues by the instalment method, deferring recognition of gross profit until cash is collected.
2. Pre-tax accounting income and taxable income differ because dividends received from Canadian corporations were not included in Rye Corp.’s taxable income, while 100% of the dividends received were included as revenue for financial statement purposes.
3. Flax Corp.’s estimated warranty costs (covering a three-year period) are expensed for accounting purposes at the time of sale, but deducted for income tax purposes only when paid.
Solution 18-70
1. Reversible difference. This difference in the timing of revenue recognition between pre-tax accounting income and taxable income will initially increase pre-tax accounting income, but will not increase taxable income by the amount of future gross profits until cash is collected in subsequent years. Assuming the estimate as to collectibility of instalment receivables is valid, the total amounts reported as gross profits for accounting purposes and for tax purposes will be equal over the life of a group of instalment receivables. The time lag between the accrual for accounting purposes and the recognition for tax purposes will increase the deferred tax liability as long as instalment sales are level or increasing. The deferred tax liability will be reduced as the receivables are collected.
2. Permanent difference. This difference in pre-tax accounting income and taxable income will never reverse because present tax laws allow a corporation that owns shares in another Canadian corporation to exclude the dividends it receives from that corporation. Thus, there are no tax consequences for such dividends, even though they are recognized as income for accounting purposes. [Note from author: this is not exactly correct. It is true such dividends are not subject to Part I (“regular” income tax) but they may be subject to Part IV tax.]
3. Reversible difference. The full estimated three years of warranty expense reduces the current year's pre-tax accounting income, but will reduce taxable income in varying amounts each year as the costs are paid. Assuming the warranty estimate is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three-year period. This is an example of an expense that, in the first year, reduces pre-tax accounting income more than it does the taxable income and, in later years, reverses and reduces taxable income without affecting pre-tax accounting income.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 18-71 Permanent and reversible differences
Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or reversible differences. For reversible differences, indicate whether they will create deferred tax assets or deferred tax liabilities.
1. Investments accounted for by the equity method (investment income exceeds dividends received)
2. Advance rental receipts
3. Membership costs for executives at a local golf club
4. Estimated future warranty costs
5. Excess of pension contributions over pension expense
6. Expenses incurred in obtaining tax-exempt revenue
7. Instalment sales
8. Excess CCA over accounting depreciation
9. Long-term construction contracts
10. Premiums paid on life insurance of officers (company is the beneficiary)
11. Penalty assessed by the CRA for late submission of income tax return
Solution 18-71
1. Reversible difference, deferred tax liability
2. Reversible difference, deferred tax asset
3. Permanent difference
4. Reversible difference, deferred tax asset
5. Reversible difference, deferred tax liability
6. Permanent difference
7. Reversible difference, deferred tax liability
8. Reversible difference, deferred tax liability
9. Reversible difference, deferred tax liability
10. Permanent difference
11. Permanent difference
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-72 Reversible differences
There are four types of reversible differences. For each type, indicate the cause of the difference, give some examples, and indicate whether the difference will create a taxable or deductible amount in the future.
Solution 18-72
1. Revenues or gains taxable after they are recognized in pre-tax accounting income. Examples are instalment sales, long-term construction contracts, and the equity method of accounting for investments. They result in future taxable amounts.
2. Revenues or gains taxable before they are recognized in pre-tax accounting income. Examples are subscriptions received in advance and rents received in advance. They result in future deductible amounts.
3. Expenses or losses deductible before they are recognized in pre-tax accounting income. Examples are the use of CCA for tax purposes, prepaid expenses, and pension funding in excess of pension expense. They result in future taxable amounts.
4. Expenses or losses deductible after they are recognized in pre-tax accounting income. Examples are warranty expenses, estimated lawsuit losses, and unrealized losses on investments. They result in future deductible amounts.
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-73 Calculate taxable income
The records for Kalman Ltd. show the following data for calendar 2023:
1. Gross profit on instalment sales recorded on the books was $100,000. Gross profit from collections of instalment receivables was $50,000.
2. Golf club dues were $3,800.
3. Machinery was acquired in January 2023 for $300,000. Kalman uses straight-line depreciation over a ten-year life (no residual value). For tax purposes, Kalman uses CCA at 14% for 2023 after considering the half-year rule.
4. Dividends received from a Canadian corporation were $4,000.
5. The estimated warranty liability related to 2023 sales was $19,600. Warranty repair costs paid during 2023 were $13,600. The remainder will be paid in 2024.
6. Pre-tax accounting income is $250,000. The enacted income tax rate is 25%.
Instructions
a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income.
b) Prepare the required adjusting entries to record income taxes for 2023.
Solution 18-73
a) Pre-tax financial income $250,000
Permanent differences
Golf dues (add back) 3,800
Dividends (deduct) (4,000)
Reversible differences
Instalment sales ($100,000 – $50,000) (50,000)
CCA ($42,000 – $30,000) (12,000)
Warranty expense ($19,600 – $13,600) 6,000
Taxable income $193,800
b) Current Tax Expense 48,450
Income Tax Payable (25% × $193,800) 48,450
Deferred Tax Expense 14,000
Deferred Tax Asset (25% × $6,000) 1,500
Deferred Tax Liability [25% × ($50,000 + $12,000)] 15,500
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-74 Calculate future income taxes
Pan Corp., at the end of 2023, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows:
Pre-tax accounting income $300,000
Estimated warranty expenses deductible when paid 800,000
Excess CCA (600,000)
Taxable income $500,000
Estimated warranty expenses of $530,000 will be deductible in 2024, $200,000 in 2025, and $70,000 in 2026. The use of the depreciable assets will result in taxable amounts of $200,000 in each of the next three years.
The enacted tax rate is 30% and is not expected to change.
Instructions
a) Prepare a schedule of the future taxable and deductible amounts.
b) Prepare the required adjusting entries to record income taxes for 2023.
Solution 18-74
a) 2024 2025 2026 Total
Future taxable (deductible) amounts
Warranties $(530,000) $(200,000) $(70,000) $(800,000)
Excess CCA 200,000 200,000 200,000 600,000
b) Current Tax Expense ($500,000 x 30%) 150,000
Income Tax Payable 150,000
Deferred Tax Asset ($800,000 x 30%) 240,000
Deferred Tax Liability ($600,000 × 30%) 180,000
Deferred Tax Benefit 60,000
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18- 75 Permanent and reversible differences and disclosure
The records for Gursoy Inc. show the following data for calendar 2023:
1. Pre-tax accounting income is $175,000. The enacted income tax rate is 28%.
2. The gross profit on construction contracts calculated using percentage of completion recorded on the books was $100,000. No contracts were completed in 2023 and so the gross profit for tax purposes was $0.
3. Interest paid on late and deficient tax instalments was $3,000.
4. Equipment was acquired in January 2023 for $300,000. Gursoy uses straight-line depreciation over a ten-year life (no residual value). For tax purposes, Gursoy uses CCA at 30% for 2023.
5. Gursoy held FV-NI investments on which $1,500 unrealized losses were recorded at the end of 2023.
Instructions
a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income.
b) Prepare the required adjusting entries to record income taxes for 2023.
c) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place.
Solution 18-75
a) Pre-tax accounting income $175,000
Permanent difference
Interest paid on late and deficient tax instalments 3,000
Reversible differences
Percentage completion construction ($100,000 – $0) (100,000)
CCA ($45,000 – $30,000) (15,000)
FV-NI investment unrealized loss 1,500
Taxable income $ 64,500
b) Current Tax Expense 18,060
Income Tax Payable (28% × $64,500) 18,060
Deferred Tax Expense 31,780
Deferred Tax Asset (28% × $1,500) 420
Deferred Tax Liability [($100,000 + $15,000) x 28%] 32,200
c)
Effective tax rate = $18,060 / $175,000 | 10.3% |
Adjustment for permanent differences = ($3,000 x 28%)/$175,000 | (0.5%) |
Adjustment for reversing differences = [($100,000 + $15,000 - $1,500) x 28%)] / $175,000 | 18.2% |
Statutory tax rate | 28.0% |
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-76 Temporary differences, deferred tax liabilities, and deferred tax assets
Explain the difference between a taxable temporary difference and a deductible temporary difference. When would a deferred tax liability by recognized and why? Explain how this differs from a deferred tax asset and how it would be recognized.
Solution 18-76
Temporary differences are differences between the tax base of an asset or liability and its reported amount in the financial statements, which will result in taxable amounts or deductible amounts in future years.
Taxable temporary differences increase taxable income in future years and cause a deferred tax liability to be recorded. Deductible temporary differences decrease taxable income in future years and cause a deferred tax asset to be recorded. Specifically, a taxable temporary difference is the difference between the carrying value of an asset or liability and its tax base. When the asset is recovered or the liability is settled in the future for an amount equal to the carrying value, taxable income of that future period will be increased. Because taxes arise in the future as a result of reversible differences existing at the SFP date, the future income tax consequences of these taxable amounts are recognized in the current period as a deferred tax liability.
A deferred tax asset is the future income tax consequences attributable to deductible temporary differences and loss carryforwards. IFRS (IAS 12) permits a deferred tax asset to be recognized only to the extent that it is probable that it will be realized in the future. Note that IFRS does not use a valuation account, although ASPE does.
Difficulty: Easy
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
Learning Objective: Explain why the Deferred Tax Asset account is reassessed at the statement of financial date, and account for the deferred tax asset with and without a valuation allowance account.
Section Reference: Review of Deferred Tax Asset Account
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 18-77 Calculate deferred income taxes
Seenath Ltd., at the end of 2023, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows:
Pre-tax accounting income $ 300,000
Excess CCA claimed for tax purposes (600,000)
Estimated expenses deductible when paid 500,000
Taxable income $ 200,000
Use of the depreciable assets will result in taxable amounts of $200,000 in each of the next three years. The estimated expenses of $500,000 will be deductible in 2026 when settlement is expected to be made.
The enacted tax rate is 25% and is not expected to change.
Instructions
a) Prepare a schedule of the deferred taxable and deductible amounts.
b) Prepare the required adjusting entries to record income taxes for 2023.
Solution 18-77
a) 2024 2025 2026 Total
Future taxable (deductible) amounts
CCA $200,000 $200,000 $ 200,000 $ 600,000
Expenses (500,000) (500,000)
b) Current Tax Expense ($200,000 × 25%) 50,000
Income Tax Payable 50,000
Deferred Tax Expense 25,000
Deferred Tax Asset ($500,000 × 25%) 125,000
Deferred Tax Liability ($600,000 × 25%) 150,000
Difficulty: Medium
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-78 Calculate change in tax rates
Engage Ltd., at the end of 2023, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows:
Pre-tax accounting income $300,000
Excess CCA claimed for tax purposes (600,000)
Estimated expenses deductible when paid 500,000
Taxable income $200,000
Use of the depreciable assets will result in taxable amounts of $200,000 in each of the next three years. The estimated expenses of $500,000 will be deductible in 2026 when settlement is expected to be made.
The enacted tax rate is 25% and is to increase to 28%, starting in 2024.
Instructions
a) Prepare a schedule of the deferred taxable and deductible amounts.
b) Prepare the required adjusting entries to record income taxes for 2023.
Solution 18-78
a) 2024 2025 2026 Total
Future taxable (deductible) amounts
CCA $200,000 $200,000 $ 200,000 $ 600,000
Expenses (500,000) (500,000)
b) Current Tax Expense ($200,000 × 25%) 50,000
Income Tax Payable 50,000
Deferred Tax Expense 28,000
Deferred Tax Asset ($500,000 × 28%) 140,000
Deferred Tax Liability ($600,000 × 28%) 168,000
Difficulty: Medium
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-79 Calculate change in tax rates, and disclosure
Vansatia Construction Inc. uses the completed contract method for tax purposes and the percentage completion method for accounting purposes Assume that on July 15, 2023, a new income tax rate is enacted that lowers the corporate rate from 30% to 28%, effective January 1, 2025. Vansatia Construction Inc. has one temporary difference at the beginning of 2023 related to $1 million tax deferral from using the completed contract method. Vansatia therefore had a Deferred Tax Liability account at January 1, 2023 with a balance of $300,000 ($1,000,000 × 30%). The $1,000,000 in gross profit recognized to date is expected to be taxed in 2026.
Instructions
a) Calculate the deferred tax liability at July 15, 2023 after taking into account the change in tax rates and prepare the related journal entry at that date.
b) Discuss if the impact of the change in rates is required to be disclosed or not under IFRS and ASPE.
Solution 18-79
The deferred tax liability at July 15, 2023 for Vansatia Construction Inc. is now $800,000, as shown below:
Total | 2024 | 2025 | 2026 | |
Future taxable amounts | $1,000,000 | $0 | $0 | $1,000,000 |
Tax rate |
| 30% | 28% | 28% |
Revised deferred tax liability | $ 280,000 | $0 | $0 | $ 280,000 |
An entry is made on July 15, 2023 to recognize the $20,000 decrease ($300,000 – $280,000) in the deferred tax liability:
Deferred Tax Liability 20,000
Deferred Tax Benefit 20,000
b) While ASPE does not require separate disclosure of the future tax expense or benefit due to a change in tax rates, IFRS does.
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Disclosure Requirements
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-80 Calculate and journalize taxable loss carryforward without valuation allowance (IFRS)
In 2023, its first year of operations, Liu Inc. reported a $500,000 loss for tax purposes. However, in 2024, Liu reported $200,000 taxable income. The tax rate is 25%, and is likely to remain at this rate for the foreseeable future. Lui reports under IFRS.
Assume that, at the end of 2023, because it is a new company, Liu’s management thought that it was probable that the loss carryforward would not be realized in the near future.
However, by the end of 2024, management feels it is now probable that there will be future taxable incomes against which the 2023 loss could be applied.
Instructions
a) What entries (if any) would be prepared in 2023 to record the loss carryforward?
b) What entries (if any) would be prepared in 2024 to record current and deferred taxes and to recognize the loss carryforward?
Solution 18-80
a) Since management believes it is probable that the loss carryforward would not be realized in the near future, no journal entry is required.
b) Current Tax Expense ($200,000 × 25%) 50,000
Deferred Tax Benefit 50,000
Deferred Tax Asset 75,000
Deferred Tax Benefit ($300,000 × 25%) 75,000
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryforward Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-81 Calculate and journalize taxable loss carryforward with valuation allowance (ASPE)
In 2023, its first year of operations, Jersey Inc. reported a $200,000 loss for tax purposes. However, in 2024, Jersey reported $250,000 taxable income. The tax rate is 20%, and is likely to remain at this rate for the foreseeable future. Jersey is a private corporation reporting under ASPE.
Assume Jersey’s management thinks, at the end of 2023, that it is likely that the loss carryforward will not be realized in the near future. Jersey chooses to use the valuation allowance method for loss carryforwards.
Instructions
a) What entries (if any) would be prepared in 2023 to record the loss carryforward?
b) What entries (if any) would be prepared in 2024 to record the current and future taxes and to recognize the loss carryforward?
Solution 18-81
a) Future Tax Asset ($200,000 × 20%) 40,000
Future Tax Benefit 40,000
Future Tax Expense 40,000
Allowance to Reduce Future Tax
Asset to Expected Realizable Value 40,000
b) Current Tax Expense ($50,000 × 20%) 10,000
Income Tax Payable 10,000
Future Tax Expense 40,000
Future Tax Asset 40,000
Allowance to Reduce Future Tax
Asset to Expected Realizable Value 40,000
Future Tax Benefit 40,000
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryforward Illustrated
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex 18-82 Presentation of deferred tax assets and liabilities
Describe how the presentation of deferred or future tax asset and liability accounts differs under IFRS and ASPE?
Solution 18-82
As of January 2020, there are no longer any differences between IFRS and ASPE as it relates to the presentation of all deferred/future tax assets and liabilities on the balance sheet or statement of financial position. Under both standards, deferred tax assets and liabilities are reported as non-current items. However, IFRS still maintains the use of the term “deferred”, whereas ASPE maintains the use of the term “future”.
Difficulty: Easy
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Statement of Financial Position Presentation
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 18-83 Intra period presentation
Hammer Ltd. sells goods and services in more than one industry. For the year 2023, the company ended with accounting and taxable income of $600,000 from continuing operations. The company also identified $35,000 of taxable income from discontinued operations, and $150,000 of Other Comprehensive Income (OCI) that will be taxable in the future. The company is subject to a 20% tax rate that is not expected to change.
Instructions
a) Prepare the journal entry to record the current income tax for 2023 and any future income tax implications.
b) Prepare a partial income statement using the above information
Solution 18-83
a)
Current Tax Expense ($600,000 x 20%) 120,000
Current Tax Expense—Discontinued Operations ($35,000 x 20%) 7,000
Income Tax Payable 127,000
Deferred Tax Expense ($150,000 x 20%) 30,000
Deferred Tax Liability 30,000
b)
HAMMER LTD.
Partial Income Statement for the Year Ended 2023
Income from continuing operations (before tax) $600,000
Less: Current tax expense (120,000) $480,000
Income from discontinued operations (before tax) 35,000
Less: Current tax expense (7,000) 28,000
Net income $508,000
Partial Statement of Comprehensive Income for the Year Ended 2023
Net income $508,000
Other comprehensive income $150,000
Less: Deferred tax expense (30,000) 120,000
Comprehensive income $628,000
Difficulty: Medium
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Statement of Financial Position Presentation
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-84 Calculate taxes under the taxes payable method, and disclosure
Gursol Exchange Inc. is arriving at the financial statement disclosures for the 2023 financial statement note on income taxes. The company uses ASPE and follows the taxes payable method. The statutory tax rate is currently 25%. During 2023, income before tax was $170,000. CCA exceeded depreciation expense by $45,000. Gursol paid interest on late and deficient tax instalments of $18,000 during 2023.
Instructions
a) Determine the income tax expense to be recorded using the taxes payable method and record the necessary journal entry.
b) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place.
Solution 18-84
a)
Accounting income before tax | $170,000 |
Add: Interest penalty on late and deficient instalments | 18,000 |
Less: CCA in excess of depreciation | (45,000) |
Taxable income | $143,000 |
Income tax expense at 25% | $35,750 |
Current Tax Expense 35,750
Income Tax Payable 35,750
b)
Effective tax rate = $35,750 / $170,000 | 21.0% |
Adjustment for permanent difference = ($18,000 x 25%) / $170,000 | (2.6%) |
Adjustment for reversing difference = ($45,000 x 25%) / $170,000 | 6.6% |
Statutory tax rate | 25.0% |
Difficulty: Medium
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 18-85 Comparing IFRS and ASPE for income tax purposes
What are the major differences between IFRS and ASPE as it relates to income tax accounting?
Solution 18-85
Under IFRS (IAS 12): In terms of recognition, no choices are permitted, and all companies apply the temporary differences approach. A deferred tax asset account is permitted to the extent that it is probable that it will be realized in the future and a valuation account is not used.
Under ASPE: A company may choose either the taxes payable method or the future income taxes method as its accounting policy. The future income taxes method is also known as the asset and liability approach and the temporary difference approach. A future income tax asset is permitted to be recognized for all deductible temporary differences, unused tax losses, and income tax reductions.
Difficulty: Medium
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
PROBLEMS
Pr. 18-86 Differences between accounting and taxable income and the effect on future income taxes
The following differences apply to the reconciliation of accounting income and taxable income of Kulik Inc. for calendar 2023, its first year of operations. The enacted income tax rate is 30% for all years.
Pre-tax accounting income $ 450,000
Excess CCA (240,000)
Lawsuit accrual 35,000
Unearned rent revenue deferred on the books but correctly
included in taxable income 25,000
Dividend income from Canadian corporations (10,000)
Taxable income $ 260,000
1. Excess CCA will reverse equally over a four-year period, 2024–2027.
2. It is estimated that the lawsuit accrual will be paid in 2027.
3. Unearned rent revenue will be recognized as earned equally over a four-year period, 2024–2027.
Instructions
a) Prepare a schedule of future taxable and deductible amounts.
b) Prepare a schedule of any deferred tax asset and/or deferred tax liability.
c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Calculate the net deferred tax expense (benefit).
d) Prepare the adjusting entries to record income tax expense, deferred taxes, and income taxes payable for 2023.
Solution 18-86
a) 2024 2025 2026 2027 Total
Future taxable (deductible) amounts:
CCA $60,000 $60,000 $60,000 $ 60,000 $240,000
Lawsuit (35,000) (35,000)
Unearned rent (6,250) (6,250) (6,250) (6,250) (25,000)
b) Future Taxable
(Deductible) Deferred Tax
Reversible Differences Amounts Tax Rate Asset Liability
CCA $240,000 30% $72,000
Lawsuit (35,000) 30% (10,500)
Unearned rent (25,000) 30% (7,500) _________
Totals $180,000 $(18,000) $72,000
c) Deferred tax expense $72,000
Deferred tax benefit (18,000)
Net deferred tax expense $54,000
d) Current Tax Expense ($260,000 x 30%) 78,000
Income Tax Payable 78,000
Deferred Tax Expense 54,000
Deferred Tax Liability 54,000
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Comprehension
AACSB: Analytic
Pr. 18-87 Multiple reversible differences
The following information is available for the first three years of operations for Faberge Corporation:
1. Year Taxable Income
2023 $250,000
2024 180,000
2025 200,000
2. On January 2, 2023, equipment was purchased for $500,000. The equipment had an estimated service life of 5 years and no residual value. Straight-line depreciation is used for book purposes and CCA at 30% is used for tax purposes (subject to the accelerated investment incentive).
3. On January 2, 2024, $210,000 was collected in advance for the rental of a building for three years. The entire $210,000 was included in taxable income in 2024, but two-thirds of the $210,000 was reported as unearned revenue at December 31, 2024 for book purposes.
4. The enacted tax rate is 40% for all years.
Instructions
a) Prepare a schedule comparing depreciation for book purposes with CCA for tax purposes.
b) Determine the deferred tax asset or liability at the end of 2023.
c) Prepare a schedule of future taxable and deductible amounts at the end of 2024.
d) Prepare a schedule of the deferred tax asset and/or liability at the end of 2024.
e) Calculate the net deferred tax expense or benefit for 2024.
f) Prepare the adjusting entries to record income tax expense, deferred taxes, and income tax payable for 2024.
g) CRITICAL THINKING In the context of predicting future cash flows, why is the deferred/future income tax method more appropriate than the taxes payable method for this company?
Solution 18-87
a) Depreciation
for Book CCA for Reversible
Year Purposes Tax Purposes Difference
2023 $100,000 $225,000 $(125,000)
2024 100,000 82,500 17,500
2025 100,000 57,750 42,250
2026 100,000 40,425 59,575
2027 100,000 28,298 71,702
Remainder -0 66,027 (66,027)
$500,000 $500,000 $ 0
b) 2024 2025 2026 2027 Remainder Total
Future taxable
(deductible) amounts:
CCA $17,500 $42,250 $59,575 $71,702 $(66,027) $125,000
Deferred tax liability: $125,000 × 40% = $50,000 at the end of 2023.
c) 2025 2026 2027 Remainder Total
Future taxable
(deductible) amounts:
CCA $42,250 $59,575 $71,702 $(66,027) $ 107,500
Rent (70,000) (70,000) (140,000)
d)
Future taxable Tax Deferred Tax
(deductible) differences Amounts Rate Asset Liability
CCA $ 107,500 40% $43,000
Rent (140,000) 40% $(56,000) _________
Totals $(32,500) $(56,000) $43,000
Net asset is disclosed as $13,000
e)
Deferred tax asset at end of 2024 $(13,000)
Deferred tax liability at beg. of 2024 50,000
Deferred tax benefit for 2024 $ 63,000
f) Current Tax Expense ($180,000 x 40%) 72,000
Income Tax Payable 72,000
Deferred Tax Asset 13,000
Deferred Tax Liability 50,000
Deferred Tax Benefit 63,000
g) When a reporting entity simply discloses the amount of taxes payable in a fiscal year without any additional information about what occurred to arrive at that value, the reader is left unknowing with regards to what events occurred as it relates to taxable/deductible items, and whether there are any implications into the future. Taxes payable is a cash outflow, and sometimes a cash inflow. The deferred/future taxes method allows the reader to understand the current taxes payable as it relates to any tax expenses (or benefits) that are deferred into the future. The user is better able to understand the cash flow implication today with regards to taxes, and whether that also includes a deferred expense or benefit into the future that will also affect cash flows.
Difficulty: Medium
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Comprehension
AACSB: Analytic
Pr. 18-88 Interperiod tax allocation with change in enacted tax rates
Harrow Corp. purchased equipment for $180,000 on January 2, 2023, its first day of operations. For book purposes, the equipment will be depreciated straight-line over three years with no residual value. Pre-tax accounting incomes and taxable incomes are as follows:
2023 2024 2025
Pre-tax accounting income $124,000 $140,000 $150,000
Taxable income 100,000 140,000 174,000
The reversible difference between pre-tax accounting income and taxable income is due solely to the use of CCA for tax purposes.
Instructions
a) Prepare the adjusting entries to record income taxes for all three years (expense, deferred tax assets/liabilities, etc.), assuming that the enacted income tax rate for all three years is 30%.
b) Prepare the adjusting entries to record income taxes for all three years (expense, deferred tax assets/liabilities, etc.), assuming that the enacted income tax rate for 2023 is 30% but that in the middle of 2024, Parliament raises the income tax rate to 35%, retroactive to the beginning of 2024.
Solution 18-88
a) 2023 2024 2025 Total
Book depreciation $ 60,000 $60,000 $60,000 $180,000
CCA 84,000 60,000 36,000 180,000
Reversible difference $(24,000) $ 0 $24,000 $ 0
2023
Current Tax Expense ($100,000 x 30%) 30,000
Income Tax Payable 30,000
Deferred Tax Expense ($24,000 x 30%) 7,200
Deferred Tax Liability 7,200
2024
Current Tax Expense ($140,000 × 30%) 42,000
Income Tax Payable 42,000
2025
Current Tax Expense ($174,000 × 30%) 52,200
Income Tax Payable 52,200
Deferred Tax Liability ($24,000 x 30%) 7,200
Deferred Tax Benefit 7,200
b)
2023
Current Tax Expense ($100,000 × 30%) 30,000
Income Tax Payable 30,000
Deferred Tax Expense ($24,000 × 30%) 7,200
Deferred Tax Liability 7,200
2024
Current Tax Expense ($140,000 × 35%) 49,000
Income Tax Payable 49,000
Deferred Tax Expense 1,200
Deferred Tax Liability 1,200*
*Future taxable amount $24,000
Deferred tax @ 30% 7,200
Deferred tax @ 35% 8,400
Adjustment required $ 1,200
2025
Current Tax Expense ($174,000 × 35%) 60,900
Income Tax Payable 60,900
Deferred Tax Liability ($24,000 x 35%) 8,400
Deferred Tax Benefit 8,400
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense.
Section Reference: Income Tax Accounting Objectives
Section Reference: Analyses of Temporary Deductible Differences
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Comprehension
AACSB: Analytic
Pr. 18-89 Comprehensive income tax situation with multiple differences (ASPE)
Vansadia Ltd., a private corporation that follows ASPE, is in the process of preparing its financial statements for its second year of operations ended December 31, 2023. Pertinent information follows:
- Accounting income before tax is $1,500,000.
Depreciation on property, plant, and equipment (PPE) in the books is $150,000 and CCA claimed will be $250,000. At the beginning of the year, the book value of the PPE was $1,200,000.
- The company sells a product with a 2-year warranty. The estimated warranty cost is $100 per unit. At the beginning of 2023, the balance in the warranty liability account was $400,000. During 2023, the company sold 5,000 units of the product and paid out $200,000 in warranty costs. It expects that the adjusted warranty liability balance at the end of 2023 to be spent evenly over 2024 and 2025. At the end of 2022, the company also expected the adjusted warranty liability amount to be paid evenly over 2023 and 2024.
- The beginning balance of the net future income tax asset account was $100,000, $60,000 related to the PPE and $160,000 related to the warranty.
- The accounting income before tax included $50,000 in entertainment expenses, of which only 50% can be deducted for income tax purposes.
- At the beginning of 2023, the enacted income tax rate went down from 40% to 35%.
- On December 31, 2023, the company received three years advance rent income (for 2024 through 2026) of $90,000, which was recorded as unearned revenue for book purposes, but which must be reported as 2023 revenue for income tax purposes.
Instructions
a) Reconcile accounting income before tax to taxable income for 2023.
b) Prepare the required income tax related journal entries for 2023.
c) Prepare the bottom section of the 2023 income statement, beginning with income before income taxes.
d) What is the amount and the SFP classifications of the future income tax asset or liability account at December 31, 2023?
Solution 18-89
a) Reconciliation:
Accounting income before tax $1,500,000
Add back 50% of entertainment expense 25,000
Warranty expense $500,000
Warranty costs allowable 200,000 300,000
Depreciation expense 150,000
CCA for tax purposes 250,000 (100,000)
Rent received in advance 90,000
Taxable income for 2023 $1,815,000
Tax payable ($1,815,000 x 35%) 635,250
b) Before recording the journal entries, we need to calculate the change in deferred tax assets and liabilities.
Future income taxes related to PPE
Future income tax liability Dec. 31, 2022 60,000
Enacted tax rate in 2022 40%
Reversible difference due to PPE in 2022 150,000
Reversible difference due to PPE in 2023 100,000
Accumulated reversible differences to end of 2023 250,000
Enacted tax rate in 2023 35%
Future income tax liability Dec. 31, 2023 87,500
Increase in future income tax liability in 2023 27,500
Future income taxes related to warranty
Reversible difference due to warranty in 2022 400,000
Enacted tax rate in 2022 40%
Future income tax asset Dec 31, 2022 160,000
Reversible difference due to warranty in 2023 300,000
Accumulated reversible differences to end of 2023 700,000
Enacted tax rate in 2023 35%
Future income tax asset Dec 31, 2023 245,000
Increase in future income tax asset in 2023 85,000
Future income taxes related to unearned rent
Rent received in advance 90,000
Enacted tax rate 35%
Increase in future income tax asset due to unearned rent 31,500
Journal entries:
Future Tax Asset ($85,000 + $31,500 – $27,500) 89,000
Future Tax Benefit 89,000
Current Tax Expense 635,250
Income Taxes Payable 635,250
c) Bottom section of the income statement for 2023:
Income before tax $1,500,000
Income tax expense
Current 635,250
Future (89,000) (546,250)
Net income $ 953,750
d) SFP presentation of future income tax accounts:
Non-current assets
Future income tax asset ($100,000 + $89,000) 189,000
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Statement of Financial Position Presentation
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Comprehension
AACSB: Analytic
Pr. 18-90 Comprehensive income tax situation with multiple differences and tax rates (IFRS)
Stadia Ltd., a public corporation that follows IFRS, is in the process of preparing its financial statements for its second year of operations ended December 31, 2023. Pertinent information follows:
- Accounting income before tax is $1,500,000. Included in this amount is $100,000 of Other Comprehensive Income arising from unrealized gains on investments.
- Depreciation on property, plant and equipment (PPE) in the books is $150,000 and CCA claimed will be $250,000. At the beginning of the year, the book value of the PPE was $1,200,000.
- The company sells a product with a 2-year warranty. The estimated warranty cost is $100 per unit. At the beginning of 2023, the balance in the warranty liability account was $400,000. During 2023, the company sold 5,000 units of the product and paid out $200,000 in warranty costs. It expects that the adjusted warranty liability balance at the end of 2023 to be spent evenly over 2024 and 2025. At the end of 2022, the company also expected the adjusted warranty liability amount to be paid evenly over 2023 and 2024.
- The beginning balance of the net deferred tax asset account was $100,000, $60,000 related to the PPE and $160,000 related to the warranty.
- The accounting income before tax included $25,000 in golf dues expenses, none of which can be deducted for income tax purposes.
- At the beginning of 2023, the enacted income tax rate went down from 40% to 35%.
- On December 31, 2023, the company received three years advance rent income (for 2024 through 2026) of $90,000, which was recorded as unearned revenue for book purposes, but which must be reported as 2023 revenue for income tax purposes.
Instructions
a) Reconcile accounting income before tax to taxable income for 2023.
b) Prepare the required income tax related journal entries for 2023.
c) Prepare the bottom section of the 2023 income statement, beginning with income before income taxes.
d) What is the amounts and the SFP classifications of the future income tax asset and liability accounts at December 31, 2023?
Solution 18-90
a) Reconciliation:
Accounting income before tax $1,500,000
Less: Other comprehensive income (100,000)
Add back golf dues expense 25,000
Warranty expense 500,000
Warranty costs allowable 200,000 300,000
Depreciation expense 150,000
CCA for tax purposes 250,000 (100,000)
Rent received in advance 90,000
Taxable income for 2023 $1,715,000
Tax payable ($1,715,000 x 35%) $600,250
b) Before recording the journal entries, we need to calculate the change in deferred tax assets and liabilities.
Deferred taxes related to PPE
Deferred tax liability Dec. 31, 2022 60,000
Enacted tax rate in 2022 40%
Reversible difference due to PPE in 2022 150,000
Reversible difference due to PPE in 2023 100,000
Accumulated reversible differences to end of 2023 250,000
Enacted tax rate in 2023 35%
Deferred tax liability Dec. 31, 2023 87,500
Increase in deferred tax liability in 2023 27,500
Deferred taxes related to warranty
Reversible difference due to warranty in 2022 400,000
Enacted tax rate in 2022 40%
Deferred tax asset Dec 31, 2022 160,000
Reversible difference due to warranty in 2023 300,000
Accumulated reversible differences to end of 2023 700,000
Enacted tax rate in 2023 35%
Deferred tax asset Dec 31, 2023 245,000
Increase in deferred tax asset in 2023 85,000
Deferred taxes related to unearned rent
Rent received in advance 90,000
Enacted tax rate 35%
Increase in deferred tax asset due to unearned rent 31,500
Journal entries:
Deferred Tax Asset 89,000
Deferred Tax Benefit 89,000
Current Tax Expense 600,250
Income Taxes Payable 600,250
c) Bottom section of the income statement for 2023:
Income before tax 1,400,000
Income tax expense
Current 600,250
Future (89,000) (511,250)
Net income $ 888,750
Other comprehensive income $100,000
Comprehensive income $988,750
d) SFP presentation of future income tax accounts:
Non-current assets
Deferred tax asset ($100,000 + $89,000) $189,000
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.
Section Reference: Tax Rate Considerations
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Statement of Financial Position Presentation
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Comprehension
AACSB: Analytic
Pr. 18-91 Deferred tax asset
Seenath Ltd. began operations on January 1, 2023, and adheres to IFRS. Its pre-tax accounting income for the first two years was as follows:
2023 $ 80,000
2024 150,000
The following items caused the only differences between pre-tax accounting income and taxable income.
1. In 2023, the company collected $75,000 in rental revenue; of this amount, $25,000 was earned in 2023; the other $50,000 will be earned equally during 2024 and 2025. The full $75,000 was included in taxable income in 2023.
2. The company pays $5,000 a year for membership in a local golf club.
3. In 2024, the company terminated a top executive and agreed to pay $30,000 severance pay. This will be paid $10,000 each year for three years, starting in 2024. The 2024 payment was made as scheduled. The entire $30,000 was expensed in 2024 for book purposes. For tax purposes, the severance pay is deductible only when it is paid.
The enacted tax rates at December 31, 2023 are:
2023 30% 2025 40%
2024 35% 2026 40%
Instructions
a) Calculate taxable income for 2023 and 2024.
b) Calculate the deferred tax asset and/or liability at the end of 2023, and prepare the adjusting entries to record income taxes for 2023.
c) Prepare a schedule of future taxable and deductible amounts at the end of 2024.
d) Prepare a schedule of the deferred tax asset/liability at the end of 2024.
e) Calculate the deferred tax expense (benefit) for 2024.
f) Prepare the adjusting entries to record income taxes for 2024 (both current and deferred).
g) Show how the deferred tax asset or liability should be reported on the SFP at December 31, 2024.
Solution 18-91
a) 2023 2024
Pre-tax accounting income $80,000 $150,000
Permanent difference:
Golf club membership 5,000 5,000
85,000 155,000
Reversible differences:
Rent 50,000 (25,000)
Severance pay 0 20,000
Taxable income $135,000 $150,000
b) 2024 2025 Total
Future taxable (deductible) amounts:
Rent $(25,000) $(25,000) $(50,000)
Tax rate 35% 40%
Future income tax (asset) liability $ (8,750) $(10,000) $(18,750) at end of 2023
Current Tax Expense ($135,000 × 30%) 40,500
Income Tax Payable 40,500
Deferred Tax Asset 18,750
Deferred Tax Benefit 18,750
c) 2025 2026 Total
Future taxable (deductible) amounts:
Rent $(25,000) $(25,000)
Severance pay (10,000) $(10,000) (20,000)
d)
Future Taxable Tax Deferred Tax
(deductible) Differences Amounts Rate Asset Liability
Rent $(25,000) 40% $(10,000)
Severance pay (20,000) 40% (8,000)
Totals $(45,000) $(18,000)
e) Deferred tax asset at end of 2024 $(18,000)
Deferred tax asset at beg. of 2024 (18,750)
Deferred tax expense for 2024 $ 750
f) Current Tax Expense ($150,000 × 35%) 52,500
Income Tax Payable 52,500
Deferred Tax Expense 750
Deferred Tax Asset 750
g) Non-current assets
Deferred tax asset ($45,000 × 40%) $18,000
Difficulty: Hard
Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.
Section Reference: Accounting Income and Taxable Income
Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets.
Section References: Deferred Tax Liabilities, Deferred Tax Assets
Learning Objective: Explain why the Deferred Tax Asset account is reassessed at the statement of financial date, and account for the deferred tax asset with and without a valuation allowance account.
Section Reference: Review of Deferred Tax Asset Account
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Statement of Financial Position Presentation
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Comprehension
AACSB: Analytic
Pr. 18-92 Loss Carryover Benefits
Zhao Inc. reports the following pre-tax incomes (losses) for both financial reporting purposes and tax purposes:
Year | Accounting Income (Loss) | Tax Rate |
2021 | $ 20,000 | 25% |
2022 | 50,000 | 28% |
2023 | (150,000) | 30% |
2024 | 120,000 | 30% |
The tax rates listed were all enacted by the beginning of 2021. Zhao reports under the ASPE future income taxes method and uses a valuation allowance to account for future tax assets.
Instructions
- Assume that at the end of 2023 it is more likely than not that 20% of the carry forward benefits will not be realized. Prepare the journal entries for 2023 and 2024.
- Based on your entries in part (a), prepare the income tax section of the 2023 and 2024 income statements, beginning with the line “Operating income (loss) before income tax.”
- Indicate how the future tax asset account will be reported on the December 31, 2023 and 2024 balance sheets.
- Repeat part (c) assuming Zhao Inc. follows IFRS.
- CRITICAL THINKING: If in 2024 the company experienced a loss again, and management believes that future profitability is in question, is it appropriate to record a deferred tax asset?
Solution 18-92
a)
December 31, 2023
Income Tax Receivable 19,000
Current Tax Benefit1 19,000
1[25% X $20,000] + [28% X $50,000] = $19,000
Future Tax Asset 24,000
Future Tax Benefit2 24,000
230% X ($150,000 – $20,000 – $50,000) = $24,000
Future Tax Benefit3 4,800
Allowance to Reduce Deferred Tax
Asset to Expected Realizable Value 4,800
3($24,000 X 20%)
December 31, 2024
Current Tax Expense4 12,000
Income Tax Payable 12,000
4[($120,000 – $80,000) X 30%]
Future Tax Expense5 24,000
Future Tax Asset 24,000
5($0 – $24,000)
Allowance to Reduce Deferred Tax
Asset to Expected Realizable Value 4,800
Future Tax Expense 4,800
b)
2023
Operating loss before income tax $(150,000)
Income tax benefit
Current benefit due to loss carryback $19,000
Future benefit due to loss carryforward 19,200 38,200
Net loss $(111,800)
2024
Operating income before income tax $120,000
Income tax
Current tax expense $12,000
Future tax expense 19,200 31,200
Net income $ 88,800
c)
Non-current assets: | 2023 | 2024 | |
Future Tax Asset | $24,000 | - | |
Less: Allowance to Reduce Deferred Tax Asset to Expected Realizable Value | (4,800) | - | |
Deferred Tax Asset (net) | $19,200 | - |
d)
Non-current assets: | 2023 | 2024 | |
Future Tax Asset | $19,200 | - | |
Under IFRS, the only difference is the deferred tax asset would be classified as a non-current asset on the 2023 SFP, and a valuation allowance is not used. Instead, the Deferred Tax Asset account would be $19,200. | |||
e) In order to meet the definition of an asset, the resource must have future economic benefit. If management believes that the probability of future income is low or nil, then the future benefit of the deferred tax asset is in question. It may be more appropriate to use a valuation allowance account, or to not record the asset in the statement of financial position at all.
Difficulty: Medium
Learning Objective: Account for tax loss carryover benefits, including any note disclosures.
Section Reference: Loss Carryback Illustrated
Section Reference: Loss Carryforward Illustrated
Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 18-93 Deferred tax asset and tax law
Identify the various possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences, tax loss carryovers, and other tax reductions.
Solution 18-93
Sources include:
- Future reversals of existing taxable temporary differences
- Future taxable income before taking into account reversing temporary differences, tax loss, and other tax reductions
- Taxable income available in carryback years
- Tax planning strategies that would, if necessary, be implemented to realize a deferred tax asset.
Difficulty: Medium
Learning Objective: Explain why the Deferred Tax Asset account is reassessed at the SFP date, and account for the deferred tax asset with and without a valuation allowance account.
Section Reference: Review of Deferred Tax Asset Account
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Pr. 18-94 Intraperiod tax allocation and disclosure
Welyhorsky Inc. presents you with the following information for its taxation year ended December 31, 2024:
Income from continuing operations before income taxes $600,000
Gain on discontinued operations 50,000
Correction of prior year’s error in recording depreciation
expense on equipment. The depreciation expense was
understated in 2023 and the capital cost allowance
was correctly calculated. 10,000
An unrealized holding gain on investments accounted for at fair value through other comprehensive income (FV-OCI). Assume that this will be taxable as ordinary income when it is realized 20,000
Tax rate all years 25%
Instructions
a) Determine how and where the current tax expense or benefit will be reported for Welyhorsky Inc. in 2024 and provide the journal entry to record current income tax.
b) Assume that the $20,000 temporary difference between the carrying amount of the FV-OCI investments and their tax base is the only temporary difference in this year. Calculate deferred taxes and prepare the related journal entry.
c) Prepare the necessary journal entry for the correction of the prior year error.
d) Show all income tax items calculated above in their appropriate financial statement.
Solution 18-94
a) Current Income Tax Expense ($600,000 x 25%) 150,000
Income Tax Payable 150,000
Current Income Tax Expense ($50,000 x 25%) 12,500
Income Tax Payable 12,500
b) Deferred Tax Expense ($20,000 x 25%) 5,000
Deferred Tax Liability 5,000
c) Deferred Tax Liability ($10,000 x 25%) 2,500
Retained Earnings 7,500
Accumulated Depreciation—Equipment 10,000
d)
WELYHORSKY INC.
Statement of Income
For the Year Ended December 31, 2023
Income from continuing operations before tax $600,000
Income tax expense 150,000
Income from continuing operations 450,000
Income from discontinued operations (net of tax of $12,500) 37,500
Net income $487,500
WELYHORSKY INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2023
Net income $487,500
Other comprehensive income
Holding gain on FV-OCI investments (net of deferred tax expense of $5,000) 15,000
Comprehensive income $502,500
WELYHORSKY INC.
Statement of Changes in Equity (partial)
For the Year Ended December 31, 2023
Retained Earnings
Retained earnings, 1/1/23, as previously reported $XX
Correction of depreciation error, (net of tax of $2,500) (7,500)
Retained earnings, 1/1/23, as adjusted XX – $7,500
Difficulty: Medium
Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics.
Section Reference: Disclosure Requirements
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
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