Question

Exercise 18-14

Bramble Corporation purchased equipment very late in 2017. Based on generous capital cost allowance rates provided in the Income Tax Act, Bramble Corporation claimed CCA on its 2017 tax return but did not record any depreciation as the equipment had not yet been put into use. This temporary difference will reverse and cause taxable amounts of $25,800 in 2018, $36,400 in 2019, and $45,200 in 2020. Bramble’s accounting income for 2017 is $232,800 and $192,800 in each of 2018 and 2019, and the tax rate is 32%. There are no deferred tax accounts at the beginning of 2017. BrambleCorporation was informed on December 31, 2018 that the enacted rate for 2019 and subsequent years is 27%.

a. Calculate the deferred tax balances at December 31, 2018 and 2019.

b.Calculate taxable income and income tax payable for 2018 and 2019.

c.Prepare the journal entries to record income taxes for 2018 and 2019

d. Prepare the income tax expense section of the income statement for 2018, beginning with the line “Income before income tax.”

e. Prepare the income tax expense section of the income statement for 2019, beginning with the line “Income before income tax.”

Answer 1

Solution a:

Bramble Corporation
Computation of Deferred Tax balance at December 31, 2017
Year	Reversal of temporary differences - Depreciation	Tax Rate	Deferred Tax Liability
2018	$25,800.00	32%	$8,256.00
2019	$36,400.00	32%	$11,648.00
2020	$45,200.00	32%	$14,464.00
	$107,400.00		$34,368.00

Bramble Corporation
Computation of Deferred Tax balance at December 31, 2018
Year	Reversal of temporary differences - Depreciation	Tax Rate	Deferred Tax Liability
2019	$36,400.00	27%	$9,828.00
2020	$45,200.00	27%	$12,204.00
			$22,032.00
	Beginning balance		$34,368.00
	Reversal of Deferreed tax liability		$12,336.00

Bramble Corporation
Computation of Deferred Tax balance at December 31, 2019
Year	Reversal of temporary differences - Depreciation	Tax Rate	Deferred Tax Liability
2020	$45,200.00	27%	$12,204.00
	Beginning balance		$22,032.00
	Reversal of Deferreed tax liability		$9,828.00

Solution b:

Bramble Corporation
Computation of Taxable income and income tax for 2018
Particulars	Amount
Pretax financial Income	$192,800.00
Add: Depreciation as per books	$25,800.00
Taxable Income	$218,600.00
Income tax (32%)	$69,952.00

Bramble Corporation
Computation of Taxable income and income tax for 2019
Particulars	Amount
Pretax financial Income	$192,800.00
Add: Depreciation as per books	$36,400.00
Taxable Income	$229,200.00
Income tax (27%)	$61,884.00

Solution c:

Bramble Corporation
Journal Entries
Year	Particulars	Debit	Credit
2018	Income tax expense Dr	$57,616.00
	Deferred Tax liability Dr	$12,336.00
	To Income Tax Payable		$69,952.00
	(Being current income tax and reversal of deferred tax recorded)
2019	Income tax expense Dr	$52,056.00
	Deferred Tax liability Dr	$9,828.00
	To Income Tax Payable		$61,884.00
	(Being current income tax and reversal of deferred tax recorded)

Solution d:

Bramble Corporation
Income tax expense section of Income Statement - 2018
Particulars		Amount
Income before Tax		$192,800.00
Income Tax Expense:
Current	$69,952.00
Reversal of deferred tax liability	-$12,336.00	$57,616.00
Net Income		$135,184.00

Solution e:

Bramble Corporation
Income tax expense section of Income Statement - 2019
Particulars		Amount
Income before Tax		$192,800.00
Income Tax Expense:
Current	$61,884.00
Reversal of deferred tax liability	-$9,828.00	$52,056.00
Net Income		$140,744.00