Question

P18.1  Anthony Ltd. began business on January 1, 2019. At December 31, 2019, it had a $58,500 balance in the Deferred Tax Liability account that pertains to property, plant, and equipment acquired on July 1, 2019 at a cost of $900,000. The property, plant, and equipment is being depreciated on a straight-line basis over six years for financial reporting purposes, and is a Class 8—20% asset for tax purposes. Anthony's income before income tax for 2020 was $60,000. Anthony Ltd. follows IFRS.

The following items caused the only differences between accounting income before income tax and taxable income in 2020.

1. In 2020, the company paid $56,250 for rent; of this amount, $18,750 was expensed in 2020. The other $37,500 will be expensed equally over the 2021 and 2022 accounting periods. The full $56,250 was deducted for tax purposes in 2020.
2. Anthony Ltd. pays $9,000 a year for a membership in a local golf club for the company's president.
3. Anthony Ltd. now offers a one-year warranty on all its merchandise sold. Warranty expenses for 2020 were $9,000. Cash payments in 2020 for warranty repairs were $4,500.
4. Meals and entertainment expenses (only 50% of which are ever tax deductible) were $12,000 for 2020.
5. The maximum allowable CCA was taken in 2020. There were no asset disposals for 2020. Assume the PPE is considered “eligible equipment” for purposes of the Accelerated Investment Incentive (under the AII, instead of using the half-year rule, companies are allowed a first-year deduction using 1.5 times the standard CCA rate).

Income tax rates have not changed since the company began operations.

Instructions

a. Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2020.

b. Calculate income tax payable for 2020.

c. Prepare the journal entries to record income taxes for 2020.

d. Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income tax.”

e. Indicate how deferred taxes should be presented on the December 31, 2020 SFP.

f. How would your response to parts (a) to (e) change if Anthony reported under ASPE?

Answer 1

(a)		A	B
	Year	Base	CCA Rate	CCA	UCC	Depreciation	CA [ CCA + UCC- Depreciation]	Temperory Difference	Reversing Difference
	2019	900000	20%	180000	720000	75000	825000	-105000	-105000
	2020	720000	20%	144000	576000	150000	570000**	6000	111000
	2021	576000	20%	115200	460800	150000	426000	34800	28800
	2022	460800	20%	92160	368640	150000	310800	57840	23040
	2023	368640	20%	73728	294912	150000	218640	76272	18432
	Staement of financial position Dec 31 , 2020
		Tax Base	Carrying amount	Deductible (Taxable ) Temporary Differences	Tax Rate	Deferref Taz Asset (Liability)	ASPE Current of long term
	Property , plant & Equipment	576000	570000**	6000	30%	1800	LT
	Prepaid Rent (2020 expense)	0	18750	-18750	30%	(5625)	C
	Prepaid Rent (2021 expense)	0	18750	-18750	30%	(5625)	LT
	Warranty liability	0	-4500	4500	30%	1350	C
	Deferred tax liability, December 31, 2020			-6750
	Deferred tax liability before adjustment			-4500
	Increase in deferred tax liability and deferred tax expense for 2020		-2250
(b)	Accounting Income		60000
	Permanent differences :
	50% of meals expense (12000*50%)	6000
	Golf club fees	9000	15000	75000
	Reversing Difference
	Depreciation	150000
	Capital cost allowance	-144000	6000
	Rent paid	-56250
	Rent Expense	18750	-37500
	Warranty expense	9000
	Warranty payments	-4500	4500	-27000
	Taxable Income			48000
	Current incoe tax - 30%			14400
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