Question

Magna Corp. reported earnings before income taxes of $2,700,000 in 20X9 when the tax rate was 40%.

Additional information for the company for 20X9 is as follows:

a. Golf club dues, $32,000

b. Depreciation expense, $63,000

c. Development costs incurred during year; capitalized for accounting purposes, $160,000

d. Warranty costs accrued during year, $36,000

e. Interest and penalty for late payment of payroll taxes, $40,000

f. CCA, $300,000

g. Amortization of capitalized development costs, $16,000

h. Costs incurred during year for warranty work completed, $27,000

Required:

Calculate 20X9 income taxes payable. Show your work.

Answer 1

Sl No	Particulars	Amount in $	Treatment	Actual Amount Considered
1	Income Before Taxes	2,700,000		2,700,000
	Adjustments:
2	Golf Club Dues	32,000	reduced from income as the amount is an accrued expense even though the payment is still pending	(32,000)
3	Depreciation expense	63,000	Actual depreciation expenses are not considered while calculating taxable income, only CCA is taken into account	-
4	Development Cost incured	1,60,000	No special treatment as these expense has already been capitalised	-
5	Warranty Cost Accrued	36,000	These are accrued expenses and are subtracted from the income	(36,000)
6	Interest and Penality for Late Payment of payroll Taxes	40,000	They are non deductible expenses while computing taxable income
7	Capital Cost Allowance	300,000	Can be dedcuted as an expense	(300,000)
8	Amortisation of Capitalised development Cost	16,000	They are eligible deuctions	(16,000)
9	Cost incured for warranty works completed	27,000	already the warranty cost acrrued has been debited, the actal expenses will be debited to warranty cost accrued account.	-
10	Total Taxable Income			2,316,000

Total Tax payable = Total taxable income * rate of tax

= 2,316,000*40% = 926,400/-