Question

Denison Corp. is a publicly traded company and is currently preparing its financial statements for its 20X7 year ended. Denison’s accounting income before tax is $1,800,000. The following items have been recorded in accounting income as an expense or revenue item, as appropriate: Depreciation and amortization expense $1,420,000 Dividend revenue from a taxable Canadian corporation $450,000 Fines for polluting the environment $90,000 Gain on sale of equipment $310,000 Life insurance premium expense $25,000 Meals and entertainment expense $390,000 Warranty expense $680,000 Additional information:

1. At December 31, 20X6, the net book value of the equipment was $9,700,000. During 20X7, new equipment additions totalled $450,000.

2. At December 31, 20X6, the undepreciated capital cost of the equipment was $7,400,000.

3. At December 31, 20X6, the warranty payable was $850,000.

4. During 20X7, the company sold equipment for net proceeds of $1,450,000, which had a net book value of $1,140,000 and an original cost of $2,100,000.

5. During 20X7, development costs of $520,000 were capitalized, which is the outstanding balance at December 31, 20X7. These costs are fully deductible for tax purposes.

6. In 20X7, Denison paid warranty costs of $720,000.

7. Capital cost allowance for 20X7 is $1,130,000.

8. During 20X7, Denison paid $140,000 in income tax instalments. These were debited to an income tax instalment account.

9. On July 1, 20X7, the government announced that the tax rate was increasing from 28% to 30% effective January 1, 20X8.

Required:

a) Calculate the deferred tax account balance as at December 31, 20X6.

b) Calculate the deferred tax account balance as at December 31, 20X7, the current tax expense for the year ended December 31, 20X7, and the deferred income tax expense for the year ended December 31, 20X7.

c) Prepare the journal entries to record the current and deferred income tax expense for 20X7.

Answer 1