Question

The following information was disclosed during the audit of Shawna Inc.:

Year		Amount Due per Tax Return
2020		$105,000
2021		84,000

1. On January 1, 2020, equipment was purchased for $400,000. For financial reporting purposes, the company uses straight-line depreciation over a five-year life, with no residual value. For tax purposes, the CCA rate is 25%. Assume the equipment is considered “eligible equipment” for purposes of the Accelerated Investment Incentive (under the AII, instead of using the half-year rule, companiesare allowed a first-year deduction using 1.5 times the standard CCA rate).
2. In January 2021, $225,000 was collected in advance for the rental of a building for the next three years. The entire $225,000 is reported as taxable income in 2021, but $150,000 of the $225,000 is reported as unearned revenue on the December 31, 2021 SFP. The $150,000 of unearned revenue will be earned equally in 2022 and 2023.
3. The tax rate is 30% in 2020 and all subsequent periods.
4. No temporary differences existed at the end of 2019. Shawna expects to report taxable income in each of the next five years. Its fiscal year ends December 31.

Shawna Inc. follows IFRS.

Instructions

a. Calculate the amount of capital cost allowance and depreciation expense for 2020 and 2021, and the corresponding carrying amount and undepreciated capital cost of the depreciable assets at December 31, 2020 and 2021.

b. Determine the balance of the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2020, and indicate the account's classification on the SFP.

c. Prepare the journal entry(ies) to record income taxes for 2020.

d. Draft the bottom of the income statement for 2020, beginning with “Income before income tax.”

e. Determine the balance of the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2021, and indicate the account's classification on the December 31, 2021 SFP.

f. Prepare the journal entry(ies) to record income taxes for 2021.

g. Prepare the bottom of the income statement for 2021, beginning with “Income before income tax.”

h. Provide the comparative SFP presentation for the deferred tax accounts at December 31, 2020 and 2021. Be specific about the classification.

i. Is it possible to have more than two accounts for deferred taxes reported on an SFP? Explain.

j. How would your response to part (h) change if Shawna Inc. reported under the ASPE future/deferred income taxes method?

Answer 1

Solution:-

(a) Calculation of Capital Cost Allowance,Depreciation and Balances:-

YEAR	BASE (A)	CCA (B)	UCC        (A-B)	DEPRECIATION (C)	CARRYING AMOUNT	REVERSING AMOUNT (C-B)
2020	$4,00,000 X 25% X0.5	$50,000	3,50,000	$80,000	$3,20,000	$30,000
2021	$3,50,000 X 25%	$87,500	2,62,500	$80,000	$2,40,000	-7,500

(b)

Balance Sheet Account    December 31,2020	carrying Amount	Tax Basis	Deductible Temporary Differences	Tax Rate	Future Tax Asset	(PE GAAP) Current or Long -Term
Property, Plant & Equipment	$3,20,000	$3,50,000	$30,000	40%	$12,000	LT (Long term)
Future Income Tax Asset,December 31, 2020	12,000
Future income Tax account before adjustment	0
Incr.in future income tax asset and future income tax benefit for 2020	$12,000

(c) Journal Entries to record income tax for 2020

PARTICULAR	DEBIT	CREDIT
Future Income tax Asset	12,000	-
To Future Income tax Benefit	-	12,000
Current Income tax Expense	1,05,000	-
To Income Tax Payable	-	1,05,000
(As given in the problem)

$1,05,000 taxes due for 2020/30% (2020 tax rate) = $3,50,000 taxable income for 2020.

(d)

PARTICULAR	AMOUNT	AMOUNT
Income before Income taxes		$3,20,000
Income tax expenses
Current	$1,05,000
Future Benefit	-12,000	93,000
Net Income		2,27,000

Pretax Accounting Income	X
Excess depreciation per book (from (a) above)	30,000
Taxable income (from © above)	$3,50,000

Solving for X ; X + $30,000 = $3,50,000; X = 3,20,000 Pretax Accounting income.

(e)

Balance Sheet Account    December 31,2020	carrying Amount	Tax Basis	Deductible Temporary Differences	Tax Rate	Future Tax Asset	(PE GAAP) Current or Long -Term
Property, Plant & Equipment	$2,40,000	$2,62,000	$22,500	30%	6,750	LT
Unearned Revenue - Current	*75,000	0	75,000	30%	22,500	C
Unearned Revenue - NonCurrent	*75,000	0	75,000	30%	22,500	LT
Futrue Income Tax asset,December 31,2021	51,750
Future income tax asset before adjustment	12,000
Incr.in future income tax asset and future income tax benefit for 2021	$39,750

(f)

PARTICULAR	DEBIT	CREDIT
Future Income tax Asset	39,750	-
To Future Income tax Benefit	-	39,750
Current Income tax Expense	84,000	-
To Income Tax Payable	-	84,000
(As given in the problem)

$84,000 taxes due for 2021/30%(2020 tax rate) = $2,80,000 taxable income for 2021

(g)

PARTICULAR	AMOUNT	AMOUNT
Income before Income taxes
Income tax expenses
Current	84,000
Future Benefit	-39,750	44,250
Net Income		2,27,000
Pretax Accounting Income	X
CCA in excess of depreciation (from (a ) above)	-7,500
Excess rent collected over rent earned	1,50,000
taxable income(from (f) above)		$2,80,000

Solving for X :

X+$1,50,000 - $7,500 = $2,80,000

X = $1,37,000 pretax accounting income

(h)

refer to last column in table of part (a) and (e) above

	2020	2021
Current asset
Future income tax asset	51,750	$12,000
($22,500+$22,5006+$6750)

IFRS require that all deferred tax asstes and liabilities be reported as non-current items on a classified statement of financial position.

(i) When financial statement of several legal entities are consolidated into one for financial reporting purposes,the posibility exists that future tax accounts could have original classification on the individual balance sheets that are in common or are related to taxes from different jurisdiction .Since there is no right to offeset taxes between jurisdiction,there is possibility of having four captions for future taxeson the consolidated balance sheeet under PE GAAP.

For Example, there could be two current and two long term future tax asset or liabilit accounts .Under IFRS there wolud be two future tax assets or liability accounts.Since deferred tax assets or liabilities are classified as non- current items on a classified financial statement positions.

(j) Refer to the last column in table of part (a) and (e) above

	2021	2020
Current asset
Future income tax asset	22,500
NonCurrent asset
Future income tax asset	29,250	$12,000
(22500+6750)