Question

Questions #1

The following information is available for the first three years of operations for Faberge Corporation:

1.         Year                Accounting Income

       2020                          $ 250,000

       2021                             280,000

2. Included in the accounting income above is $10,000 annual dividends income from investments in taxpaying Canadian companies.
3. On January 2, 2020, equipment was purchased for $ 500,000. The equipment had an estimated service life of 5 years and no residual value. Straight-line depreciation is used for book purposes and CCA at 30% is used for tax purposes (ignore the half year rule for the first year).
4. On January 2, 2020, $ 210,000 was collected in advance for the rental of a building for three years. The entire $ 210,000 was included in taxable income in 2020, but two-thirds of the $ 210,000 was reported as unearned revenue at December 31, 2020 for book purposes.
5. The enacted tax rate is 40% for 2020, 35% for 2021 and 30% for 2023 and thereafter.

Instructions

1. Prepare a schedule comparing depreciation for book purposes with CCA for tax purposes.
2. Determined the taxable income and income tax payable for 2020.
3. Prepare a schedule of deferred taxable/deductible amounts and the deferred tax asset and/or liability at the end of 2020.
4. Calculate the net deferred tax expense or benefit for 2020.
5. Prepare the adjusting journal entries to record income tax expense, deferred taxes, and income tax payable for 2020.
6. Determined the taxable income and income tax payable for 2021.
7. Prepare a schedule of future taxable/deductible amounts and the deferred tax asset and/or liability at the end of 2021.
8. Calculate the net deferred tax expense or benefit for 2021.
9. Prepare the adjusting journal entries to record income tax expense, deferred taxes, and income tax payable for 2021.
10. Prepare the income tax section of the comparative income statements of 2020 and 2021

Answer 1

Ans a)

Depriciation as per books = $ 5,00,000 / 5 Years = 1,00,000/-

Depriciation as per CCA tax = $ 5,00,000 * 30% = 1,50,000/-

Ans b)

Calculation of Taxable Income for 2020

Accounting Income (2020) = $ 2,50,000

Less Divident Income not taxable. = $10,000

Less Depriciation as per CCA tax = $ 1,50,000

Add  Depriciation as per books = $ 1,00,000   

Therefore Taxable income = $ 1,90,000

Tax payble @40% on $ 1,90,000 = $ 76,000.

Ans (C) Net deferred tax asset and liability for 2020

Depriciation as per books = $ 5,00,000 / 5 Years = 1,00,000/-

Less Depriciation as per CCA tax = $ 5,00,000 * 30% = 1,50,000/-

Therefore Net deferred tax liability for 2020 = 50000/-

Ans(d)

deferred tax benefit for 2020 (50000*40%) = 20000/-

Ans (e) journal entry.

Profit and loss account Dr. $ 96,000

To Income Tax Payable Cr. $ 76,000

To Deferred tax liability Cr. $ 20,000

Ans(f)

Depriciation as per books for (2021)= $ 4,00,000 / 4 Year = 1,00,000

Depriciation as per CCA tax for 2021 = $ 3,50,000 * 30% = 1,05,000

Calculation of Taxable Income for 2021

Accounting Income (2021) = $ 2,80,000

Less Depriciation as per CCA tax = $ 1,05,000

Add  Depriciation as per books = $ 1,00,000   

Therefore Taxable income = $ 2,75,000

Tax payble @35% on $ 2,75,000 = $ 96,250.

Ans (g) Net deferred tax asset and liability for 2021

Depriciation as per books = $ 4,00,000 / 4 Years = 1,00,000/-

Less Depriciation as per CCA tax = $ 3,50,000 * 30% = 1,05,000/-

Therefore Net deferred tax liability for 2020 = 5000/-

Ans(h)

Opening Deferred tax liability ( 2020) = 20000

deferred tax benefit for 2021 (5000*35%) = 1750

Closing deferred tax benefit / liability ( 2021) = 21750.

Ans (i) journal entry.

Profit and loss account Dr. $ 98,000

To Income Tax Payable Cr. $ 96,250

To Deferred tax liability Cr. $ 1750

Ans ( j )

Year Income as per tax Tax paid

       2020                          $ 1,90,000 $ 76,000

       2021                           $ 2,75,000 $ 96,250