Question

QUESTION #2 Part A Lunenberg Ltd, a publicly accountable enterprise, began business on January 1, 2015 and follows IFRS. Its pretax accounting income for the first two years was as follows: 2015 $ 80,000 2016 150,000

The following items caused the only differences between pretax accounting income and taxable income.

1. In 2015, the company collected $75,000 in rental revenue; of this amount, $25,000 was earned in 2015; the other $50,000 will be earned equally during 2016 and 2017. The full $75,000 was included in taxable income in 2015.

2. The company pays $5,000 in 2015and 2016 for membership in a local golf club.

3. In 2016, 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 2016. The 2016 payment was made. The entire $30,000 was expensed in 2016 for book purposes.

For tax purposes, the severance pay is deductible only when it is paid.

The enacted tax rates at December 31, 2015 are: 2015 30% 2017 40% 2016 35% 2018 40%

Instructions:

(a) Calculate taxable income and income tax payable for 2015 and 2016

(b) Calculate the deferred income tax asset and/or liability at the end of 2015, and prepare the adjusting journal entries to record income taxes for 2015

Answer 1

a)			2015	2016
	Pre-tax accounting income		$      80,000.00	$ 150,000.00
	Add: Permanent difference
	Golf club membership		$        5,000.00	$      5,000.00
	Reversible differences:		$      85,000.00	$ 155,000.00
	Rent		$      50,000.00	$ (25,000.00)
	Severance pay		$                     -	$    20,000.00
	Taxable income		$    135,000.00	$ 150,000.00
	Tax Rate		30%	35%
	Income Tax Payable		$      40,500.00	$    52,500.00
b)			2016	2017	TOTAL
	Future taxable (deductible) amounts		$    (25,000.00)	$ (25,000.00)	$ (50,000.00)
	Tax Rate		35%	40%
	Future income tax (asset) liability at end of 2015	$      (8,750.00)	$ (10,000.00)	$ (18,750.00)
	JE
	Current Tax Expense ($135,000 × 30%		$      40,500.00
	Income Tax Payable			$    40,500.00
	Deferred Tax Asset		$      18,750.00
	Deferred Tax Benefit			$    18,750.00