Question

During 2020, the following items caused taxable income to be different than accounting income:

• For tax purposes, CCA was $172,800 in 2020. The year-end book value is $720,000 and the tax value is $691,200.
• In 2020 Killim Inc. paid $72,000 rent in advance for 2020 ($36,000) and 2021 ($36,000). The Canada Revenue Agency (CRA) allows the deduction of actual rent payments when they are paid. By December 31, 2020, Killim had a balance of $36,000 in Prepaid Rent.
• In 2020, dividends of $24,000 were received from a taxable Canadian corporation and included in accounting income. These dividends are not taxable.
• In 2020, a golf club membership of $7,200 was an expense in arriving at accounting income. This is not an allowable deduction for tax purposes.
• In 2020, Killim Inc. offered a warranty on goods sold. Warranty expenses for 2020 were $26,400 and warranty cash payments in 2020 were $9,600. The balance of the warranty liability on the statement of financial position is $16,800. The Canada Revenue Agency (CRA) allows the deduction of actual warranty costs when they are paid.

Required:

( a ) Calculate taxable income for 2020.

( b ) Calculate current income taxes payable for 2020.

( c ) Calculate the balance of any deferred income taxes asset and deferred income tax liability at December 31, 2020. Do this for each item and identify any balances as either a deferred tax asset or a deferred tax liability.

            (d ) Prepare the journal entry(s) to record current income taxes for 2020 and record an entry for of the deferred tax determined in part c.

During 2020, the following items caused taxable income to be different than accounting income:

• For tax purposes, CCA was $172,800 in 2020. The year-end book value is $720,000 and the tax value is $691,200.
• In 2020 Killim Inc. paid $72,000 rent in advance for 2020 ($36,000) and 2021 ($36,000). The Canada Revenue Agency (CRA) allows the deduction of actual rent payments when they are paid. By December 31, 2020, Killim had a balance of $36,000 in Prepaid Rent.
• In 2020, dividends of $24,000 were received from a taxable Canadian corporation and included in accounting income. These dividends are not taxable.
• In 2020, a golf club membership of $7,200 was an expense in arriving at accounting income. This is not an allowable deduction for tax purposes.
• In 2020, Killim Inc. offered a warranty on goods sold. Warranty expenses for 2020 were $26,400 and warranty cash payments in 2020 were $9,600. The balance of the warranty liability on the statement of financial position is $16,800. The Canada Revenue Agency (CRA) allows the deduction of actual warranty costs when they are paid.

Required:

( a ) Calculate taxable income for 2020.

( b ) Calculate current income taxes payable for 2020.

( c ) Calculate the balance of any deferred income taxes asset and deferred income tax liability at December 31, 2020. Do this for each item and identify any balances as either a deferred tax asset or a deferred tax liability.

            (d ) Prepare the journal entry(s) to record current income taxes for 2020 and record an entry for of the deferred tax determined in part c.

Answer 1

a) Taxable income for 2020 = $ 684,000 per below working

Particulars	Amount in $	Remarks/Justification
Accounting Income	720000	Remarks/Justification
Less: Expenditure Allowable as per income tax rules not deducted in accounting income
Rent	-36000	Rent paid in advance for 2021 shown in prepaid expenes in accounting book
dividends	-24000	Dividend received is non taxable whereas in accounting book it is included in income
Add: Expenditure not allowable as per income tax rules but deducted in accounting income
Membership	7200	Golf club membership of $7,200 was an expense in arriving at accounting income but not a deductible expenditure as per income tax
Warranty Exp	16800	Total warranty expense in accounting income is 26,400 out of which 16800 is accrued and not paid. As per income tax rule only paid portion is deductible expenditure. Hence accured portion 16,800 is added back in accounting income
Total taxable income	684000

b) Current income tax liability for 2020 = $27,360

A	Accounting Income	720000
B	Tax Income as per book	691200
C	Tax amount considered in book (A-B)	28800
D	Tax Rate (C/A*100)	4
E	Taxable income as per working in Answer a	684000
F	Tax Rate(D)	4%	assuming rate is same as considered in books
G	Tax Amount (E*F)	27360

c) Deferred tax Asset(DTA) and deferred tax liability(DTL) is for such temorary differences which are to be reversed in future. If income as per books is mre than taxable income then it means that we have to pay more tax in future thus recoreded as DTL and similarly if income as per books is less than taxable income then itmeans we have paid more tax and has to pay less tax in future hence DTA being recorded.

Particulars	Amount in $	DTL/DTA	Remarks/Justification	Deferred Tax amount @4%
Rent	-36000	DTL	Advance rent paid is considered as deductible exp in 2020 so in 2021 it will be taxable and added in income	-1440
dividends Received	-24000	N/A	Dividend received being non taxable in nature is of permanent nature So no DTL/DTA applicable
Membership Fees	7200	N/A	Golf club membership being non taxable deductible is of permanent nature and hence no DTA/DTL applicable
Warranty Exp	16800	DTA	Accrual of 16800 is not deducted as expenses in 2020 and allowable in future when paid, hence it is DTA	672
Deferred tax Asset	672
Deferred tax Liability	-1440

d) Entry for Current income tax

Income tax already recorded =$ 28,800

Actual income tax =$ 27,360

Entry for differencial current income tax

Dr Income tax payable 1,440

Cr Current Tax Expense 1,440

Entry for Deferred Tax Expenses

Dr Deferred tax Asset 672

Dr Deferred tax expense 768

Cr Deferred tax liability 1440