Question

In 2014, the first year of its existence, Virginia Ltd.'s accountant, in preparing both the income statement and the tax return, developed the following list of items creating differences between accounting and taxable income:

1. The company sells its merchandise on an installment contract basis. In 2014, Virginia elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2014. These procedures created a $240,000 difference between book and taxable incomes for 2014. Future collections of installment receivables are expected to result in taxable amounts of $120,000 in each of the next two years.

2. The company depreciates all of its property, plant and equipment using CCA for tax purposes and straight-line for accounting purposes. This resulted in $42,000 excess CCA over accounting depreciation. This temporary difference will reverse equally over the three year period from 2015–2017.

3. On July 1, 2014, Virginia leased part of its building to Swift Books Ltd. on a two-year operating lease. The monthly rent is $30,000, and Swift paid the first year's rent in advance (July 1, 2014 to June 30, 2015). Virginia reported the entire amount on its tax return. This resulted in a $180,000 difference between book and taxable incomes.

4. Virginia sold $150,000 of bonds issued by the Government of Canada at a gain of $18,000, which was included as other income in its income statement. A taxable capital gain of $9,000 was reported for tax purposes.

5. In 2014, Virginia insured the lives of its chief executives. The premiums paid were $12,000 and this amount was shown as an expense on the income statement. However, this amount was not deductible for tax purposes. Virginia is a publicly accountable enterprise adhering to IFRS. Their 2014 income statement showed "Income before income taxes" of $900,000. The currently enacted income tax rate (and for the foreseeable future) is 40%. Except for those items mentioned above, there are no other differences between book and taxable incomes.

Instructions

a. Calculate the income tax payable for 2014.

b. Prepare a schedule of future taxable/deductible amounts at the end of 2014.

c. Prepare a schedule of the deferred tax asset and deferred tax liability at the end of 2014.

d. Calculate the net deferred tax expense (benefit) for 2014.

e. Prepare the journal entry (entries) recording income tax expense, income tax payable, and deferred income taxes for 2014.

f. How would the income tax expense and any deferred taxes be disclosed on the financial statements?

Answer 1

a)

Income Tax Payable
Pre-tax financial income	$900,000
Add: Permanent differences
Government of Canada bonds	-$9,000
Executive insurance premiums	$12,000
Net Permanent differences	$3,000
Add: Temporary differences
Instalment contracts	-$240,000
Excess CCA	-$42,000
Rental income	$180,000
Net Temporary differences	-$102,000
Taxable Income	$801,000
Tax rate	40%
Income tax payable	$320,400

b)

Future taxable (deductible) amounts:	2015	2016	2017	Total
Instalment sales	120,000	120,000		240,000
Depreciation	14000	14000	14000	42,000
Unearned rent	-180000			-180,000

c)

	Future Taxable (Deductible) Amount	Tax Rate/Amt	Deferred Tax
Temporary differences			Asset	Liability
Instalment sales	$240,000	40%		$96,000
Depreciation	$42,000	40%		$16,800
Rent	-$180,000	-$72,000
Totals	$102,000		-$72,000	$112,800

d) Deferred tax asset at end of 2014 ....................................................... $(72,000)
     Deferred tax asset at beginning of 2014 .................................................. -0-
     Deferred tax (benefit) ............................................................................... $(72,000)

Deferred tax liability at end of 2014.......................................................... $112,800
Deferred tax liability at beginning of 2014 ................................................ -0-
Deferred tax expense ............................................................................... $112,800

Deferred tax expense ............................................................................... $112,800
Deferred tax (benefit) ............................................................................... (72,000)
Net deferred tax expense for 2014........................................................... $ 40,800

e) Current Tax Expense ............................................................................... 320,400
     Deferred Tax Expense ............................................................................. 40,800
     Deferred Tax Asset .................................................................................. 72,000
                            Deferred Tax Liability........................................................................ 112,800
                             Income Tax Payable......................................................................... 320,400

f) Income statement
Income before income taxes ................................................................... $900,000
Income tax expense:
Current........................................................................................... $320,400 Deferred............................................................................................ 40,800
Total………………………………………………………………………………………………361,200
Net income ............................................................................................... $538,800

Statement of financial position

Long-term assets:
          Deferred tax asset ............................................................................ $72,000

Long-term liabilities:
          Deferred tax liability .......................................................................... $112,800