In: Accounting
Waterway Services Ltd. follows ASPE and had earned accounting
income before taxes of $518,000 for the year ended December 31,
2020.
During 2020, Waterway paid $80,000 for meals and entertainment
expenses.
In 2017, Waterway’s tax accountant made a mistake when preparing
the company’s income tax return. In 2020, Waterway paid $9,700 in
penalties related to this error. These penalties were not
deductible for tax purposes.
Waterway owned a warehouse building for which it had no current
use, so the company chose to use the building as a rental property.
At the beginning of 2020, Waterway rented the building to Trung
Inc. for two years at $56,000 per year. Trung paid the entire two
years’ rent in advance.
Waterway used the straight-line depreciation method for accounting
purposes and recorded depreciation expense of $311,600. For tax
purposes, Waterway claimed the maximum capital cost allowance of
$465,300. This asset had been purchased at the beginning of the
year for $3,069,000.
In 2020, Waterway began selling its products with a two-year
warranty against manufacturing defects. In 2020, Waterway accrued
$294,000 of warranty expenses: actual expenditures for 2020 were
$90,600 with the remaining $203,400 anticipated in 2021.
In 2020, Waterway was subject to a 25% income tax rate. During the
year, the federal government announced that tax rates would be
decreased to 23% for all future years beginning January 1,
2021.
Prepare the journal entries to record current and future income
taxes for 2020
Summary Calculation | |||
Calculation | 2020 | 2021 | |
Amount $ | Amount $ | ||
Income before taxes for the year ended 31-Dec-2020 | 518,000.00 | - | |
Add: Penalties related to 2017 | 9,700.00 | - | |
Less: Building Rental from Trung | 56000/2 | -28,000.00 | 28,000.00 |
Add: Warranty Expense not related to the CY | 294,000 - 90600 | 203,400.00 | -203,400.00 |
Net income before tax for the year 2020 | 703,100.00 | -175,400.00 | |
Tax Payable @ 25% for the year 2020 | 175,775.00 | -43,850.00 |
Journal Entries for Tax Calculation Purpose | ||||||
SL | Particulars | Group | Debit $ | Credit $ | Effect | Income Bal |
1 | Capital Ac | Capital | 9,700.00 | |||
ITR Penalties Expense Ac | Indirect Expense | 9,700.00 | Add | 527,700.00 | ||
(Being Income Tax Return penalties not allowable as expenditure. Hence added back to Income) | (518,000+9700) | |||||
2 | Building Rental Ac | Income | 28,000.00 | |||
Advance Building Received Acc | Current Liabilities | 28,000.00 | Deduct | 499,700.00 | ||
(Being Advance rental received transferred from Current year to Previous Year) | ||||||
3 | Warranty expence paid in Advance Ac | Current Asset | 203,400.00 | |||
Warranty expence Ac | Indirect Expense | 203,400.00 | Add | 703,100.00 | ||
(Being Warranty Expences not related to current year transferred to Prepaid Account ) | ||||||
4 | Income Tax Ac | Indirect Expense | 175,775.00 | |||
Bank/Cash | Current Asset | 175,775.00 | Deduct | 527,325.00 | ||
(Being Income Tax Expense paid for the year 2020) | ||||||
** Meals & Entertainment expences allowed as deduction from Income. | ||||||
** The CCA is allowable when purchases are anticipated to last for years, such as equipment and machinery. Businesses can claim from zero to the maximum amount of CCA in any given year, and carry over any amount less than the maximum to claim for the next year |