Question

Monty Corporation has provided the following information for the year ended December 31, 2020.

Monty Corporation Income Statement For the Year Ended December 31, 2020
Revenue
Service Revenue		102,500
Dividend Revenue		11,000		$113,500
Operating Expenses
Supplies Expense		2,200
Depreciation Expense		20,900
Advertising Expense		1,000
Meals and Entertainment Expense		6,000
Rent Expense		9,400
Litigation Expense		8,300
Salaries and Wages Expense		40,600
Warranty Expense		4,100		92,500
Operating Income before income tax				$21,000

Additional Information:

1.		Monty is privately owned, and uses ASPE. The dividend revenue represents dividends received from taxable Canadian corporations.
2.		Monty’s income tax rate is 30%.
3.		On January 1, 2020, Monty had a future tax liability of $3,135 related to its property, plant, and equipment (PPE).
4.		During the year warranty expense of $4,100 was accrued. One half of this amount was paid during 2020. This is the first year Monty offers warranties on services rendered.
5.		Property, plant, and equipment was purchased for $104,500 on January 1, 2019. These assets are being depreciated on a straight-line basis over five years with no residual value and have a 20% CCA rate. This PPE is considered “eligible equipment” for purposes of the Accelerated Investment Incentive (the “AII”) (under the AII, instead of using the half-year rule, companies are allowed a first-year deduction using 1.5 times the standard CCA rate).
6.		On July 1, Monty was sued by a competitor. Although the lawsuit has not been finalized, management believes that it is likely that a settlement will be reached in the next year for $8,300.
7.		On November 30, $4,000 cash was paid in advance for four months of advertising, starting Dec. 1.

Calculate taxable income and taxes payable for 2020.

Taxable Income		$
Taxes Payable		$

Prepare the journal entries to record 2020 income taxes (current and future). (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
(To record current tax expense.)
(To record future tax expense.)

Answer 1

The total taxable income is $16900 and the tax liability is $14965. Below are the calculations:

	Income statement for Monty for the year ended 31st Dec 2020
	Revenue					$121,800
	(Includes the law suit to be received of $8300)
Less:	Expenses
	Supplies expenses			2200
	Depreciation expenses			31350
	Advertisement expenses			5000
	Meals and entertainment expenses			6000
	Rent expenses			9400
	Litigation expenses			8300
	Salaries and wages			40600
	Warranty expenses			2050
	Total expenses			104900		104900
	Operating income before taxes					$16,900
	Tax rate 30%					$5,070
	Tax liability					$11,830
Add:	Future tax liability					$3,135
	Total tax liability					$14,965

Note:

Warranty expenses:

As warranty expenses in the problem only half were accrued, so the amount of $4100/2 = $2050

Revenue:

The revenue will also included accrued income of $8,300 for the lawsuit

Depreciation:

As we know from the sum 20% depreciation is calculated. However, it is 1.5 times the value of depreciation, so

$20900*1.5 = $31350

Tax rate:

The tax is 30% on $16900 which is $16900*30%=$11830. In addition to this addition of future tax liability is added which is $3135 and the total tax liability comes upto $14965.

Journal entries:

	Journal entries		Dr	Cr
1	Income tax a/c dr		$11,830
	to Income tax payable a/c			$11,830
2	Income tax expense a/c dr		$3,135
	To Deferred tax liability a/c			$3,135