Question

Agatha Agate Inc. began business on January 1, 2013. At December 31, 2013, it had a $6,000
balance in the deferred tax liability account related to property, plant and equipment. The
equipment, purchased in 2013, cost $1,200,000. Agatha is depreciating the equipment on a
straight-line basis over six years for financial reporting purposes. The equipment is a Class 8 -20%
asset for tax purposes. In 2013 Agatha reported depreciation expense of $100,000 and calculated
CCA as $120,000. [Note: Agatha took 50% in the year of acquisition. Both depreciation and CCA will
be calculated at the full rates in 2014]. Agatha’s before tax income in 2014 was $80,000. Agatha
follows IFRS. Information about income includes the following:
a. Total rent paid in 2014 was $75,000 of which $25,000 was expensed in 2014. The remaining $50,000
represents prepaid rent, which will be expensed equally in 2015 and 2016. The full $75,000 was
deducted for tax purposes in 2014.
b. Agatha Agate Inc. pays $12,000 per year for a membership in a local golf club for the company’s
president.
c. The company now offers a one-year warranty on all merchandise sold. Warranty expenses for 2014 were
$12,000. Cash payments for warranty expense were $6,000 in 2014.

d. Meals and entertainment expenses (only 50% of which are ever deductible for tax purposes) were
$16,000 in 2014.
e. The current tax rate is 30% and the rate has not changed since Agatha began business.
Required: [16 marks]
i. Calculate the balance in the Deferred Tax Asset or Liability account at December 31, 2014 [4 marks]
ii. Calculate income tax payable for 2014 [5 marks]
iii. Prepare the journal entries to record income taxes for 2014 [2 marks]
iv. Prepare the income tax expense section of the income statement for 2014, beginning with Income before
income tax [3 marks]
v. Prepare the liability section of the Statement of Financial Position at December 31, 2014 for deferred
income taxes. [2 marks]

Answer 1

(I) Deferred tax asset/ liability:

A deferred tax is assessed or is due to the current tax period but has not been paid.

The difference between the book profit and taxable results into temporary or permanent difference.

When book profit is higher than taxable profit then entity pays lless tax in current year and more tax in future years it results in deferred tax kiliabili and vic-a- varsa

Computation of deferred tax for 2014

Particular

1. Property, plant and equipment

• Carrying amount as per books $9,00,000

Purchase cost: $ 12,00,000

Depcreiation 2013: ($1,00,000)

2014 :($2,00,000)

Balance . : $9,00,000

Income Tax basis

Purchase cost: $12,00,000

CCA 2013 . :($1,20,000)

CCA2014. : ($2,16,000)

Balance. : $8,64,000

Deduction (taxable) due to long term temporary difference. ($36,000)

• Deferred tax @30%on36,000. (A) =($10,800)

2.Rent

Prepaid for 2015

In 2014 charged in book : $25,000

Income tax purpose rent : 0

Difference (current) . :($25,000)

Deferred tax@30% (B)=($7,500)

Prepaid rent for 2016

In 2014 charge in books : $25,00

IncomeTax purpose rent: 0

Difference ( non current) : ($25,000)

• Deferred tax@30% (C) =($7,500)

3. Warranty liability

• Charged in 2014. $6,000
• Income tax. 0
• Difference ( current). $6000
• Deferred tax@30% (D) =$1,800
• Total deferred tax kialiabil for2014 (A+B+C+D). $24,000
• Balance of 2013 $6,000

Total at 12/31/2014 (DTL). $30,000

(ii) calculation of income tax payable in 2014

1. Income reported in account. $80,000
2. Add: permanent difference item

• Meal and entertainment expense . $ 8,000
• Membershipofpresident for Golf club. $12,000
• Temporary difference reversal
• Depreciation 2014. $2,00,000
• CCA In 2014. ($216,000)
• Rent paid 2014 . ($75,000)
• Expense of rent 2014. $25,000
• Warranty expense 2014 . $12,000
• Warranty actual payment. ($6,000)
• 3. Total taxable income 2014. $40,000
• 4. Tax @ 30% on $40,000. $12,000

(iii) Journal entry

• 1. Current income tax expense. $12,000

Income Tax payable . $12,000

( Being recording income tax payablefor 2014 year)

2.Deferred tax expense. $ 24,000

Deferred tax liability. $ 24,000

(Being recording current year deferred tax

portion as DTL)

(Iv) Income tax expense calculation for 2014 current year

1. Income before income tax. $ 80,000
2. Income tax for current year . ($12000)
3. Deferred tax liability for current year ($24,000)

Net income tax for current year 2014. $ 44,000

(V) Liability section to be reported in the financial statement for 2014

• Current liability

Deferred tax liability (for current year portion). $5,700

$7,500-$1,800( from answer (I))

• Non- current liability. $18,300

$10,800+$7,500 ( amount derived from the answer (I))

Note:

Deferred tax asset and liability is segregated into current or non- current ( long term) on the basis of the period for which difference occurred, If it is for 1 year it will be current otherwise non current.