Question

In: Accounting

For the year ended December 31, 2020, Stellar Ltd. reported income before income taxes of $100,000....

For the year ended December 31, 2020, Stellar Ltd. reported income before income taxes of $100,000.

In 2020, Stellar Ltd. paid $54,000 for rent; of this amount, $18,000 was expensed in 2020. The remaining $36,000 was treated as a prepaid expense for accounting purposes and would be expensed equally over the 2021-2022 period. The full $54,000 was deductible for tax purposes in 2020.

The company paid $70,000 in 2020 for membership in a local golf club (which was not deductible for tax purposes).

In 2020 Stellar Ltd. began offering a 1-year warranty on all merchandise sold. Warranty expenses for 2020 were $38,000, of which $31,000 was actual repairs for 2020 and the remaining $7,000 was estimated repairs to be completed in 2021.

Meal and entertainment expenses totalled $17,000 in 2020, only half of which were deductible for income tax purposes.

Depreciation expense for 2020 was $190,000. Capital Cost Allowance (CCA) claimed for the year was $217,000.

Stellar was subject to a 20% income tax rate for 2020. Stellar follows IFRS. At January 1, 2020, Stellar Ltd. had no balances in deferred tax accounts.

Calculate taxable income and taxes payable for 2020.

Taxable income, 2020		$
Taxes payable, 2020		$

Prepare the journal entries to record 2020 income taxes (current and deferred).

Account Titles and Explanation	Debit	Credit


(To record current tax expense.)


(To record deferred tax expense.)

Expert Solution

Calculate taxable income and taxes payable for 2020.

.	Profit Before Taxes	$100000
.	Adjustments
Less:	Rent expenses deductible	$(36000)
Add:	Membership fee paid not deductible	$70000
Add:	Meal and entertainment expense	$8500
Add:	Depreciation as per books	$190000
Less:	Capital cost allowance	$ (217000)
Add:	Estimated warranty expenses disallowed	$ 7000
	Taxable Income	$122500

.

1	Taxable Income, 2020	$122500
2	Taxes Payable, 2020 (Taxable Income * tax rate(122500*20%)	$24500

.

Prepare the journal entries to record 2020 income taxes (current and deferred).

.

Accounting Income

$100000

Current Income Tax(Book Profit*tax rate)(100000 * 20%)

$ 20000

Deferred Tax(Taxable Income- Profit as per books)*tax rate

(122500-100000)*20%

$4500

.

Account Titles and Explanation	Debit	Credit
Profit & Loss A/c	$20000
Provision for Income Tax(Current Tax)		$20000
(Being provision created for current tax at accounting income)

Deferred Tax Assets	$4500
Profit & Loss A/c		$4500
(Being deferred tax Assets created @ 20%)

.

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