intermediate financial accounting 10th canadian edition volume 2 chapter 18 solutions
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intermediate financial accounting 10th canadian edition volume 2 chapter 18 solutions...
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
CHAPTER 18 INCOME TAXES ASSIGNMENT CLASSIFICATION TABLE Topics
Brief Exercises
Exercises
Problems
1. Income taxes from a business perspective.
1
2. Difference between accounting income and taxable income, calculate taxable income.
2, 3, 4, 5, 6, 7
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 31, 32, 33
1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15
3. Taxable temporary differences, calculation of deferred/future income tax liabilities.
5, 8, 9
1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 21, 22, 30, 31
1, 2, 3, 5, 6, 7, 8, 9, 13, 14, 15
4. Deductible temporary differences, calculation of deferred/future income tax assets.
10, 11, 14
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 15, 16, 17, 18, 19, 22, 30, 31
1, 2, 3, 5, 6, 7, 8, 9, 13, 14, 15
5. Deferred/future income tax balances.
5, 6, 7, 8, 9, 11, 12, 13
4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 22, 23, 30, 31
1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15, 16
6. Multiple tax rates, tax rate changes.
13, 14
9, 10, 14, 18, 19, 21, 22, 23, 24, 25, 26, 27
2, 3, 4, 14, 16
7. Loss carrybacks.
15, 16, 17, 18, 19
24, 25, 26, 27
12
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Topics
Brief Exercises
Exercises
Problems 12, 15
8. Loss carryforwards.
16, 17, 18, 19
24, 25, 26, 27
9. Valuation of deferred/future tax asset.
18, 19
27, 28, 29
10. Presentation and disclosure of income taxes.
20, 21, 22, 23
5, 7, 8, 9, 11, 15, 21, 22, 31, 32, 33, 34
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
11. Differences between IFRS and ASPE.
23, 24
7, 8, 9, 11, 15, 20, 21, 22, 27, 31, 32, 33, 34
1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 14
7, 8, 9, 22, 27
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16
12 Temporary difference approach in a comprehensive situation
Please note: The simplifying assumption is made that unless told that a company follows ASPE, all companies in the end-of-chapter brief exercises, exercises and problems follow IFRS and use the term “deferred” rather than “future” for the tax-related accounts.
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Intermediate Accounting, Eleventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Item
Description
E18-1
Terminology, relationships, calculations, entries. Identifying Timing and Permanent Differences Identifying Timing and Permanent Differences; Deferred Tax Liabilities and Deferred Tax Assets One temporary difference through three years, one rate. Intraperiod tax allocation. Identify temporary or permanent differences and direction of adjustment. Two temporary differences, future taxable amounts, one rate, no beginning deferred taxes. Two temporary differences, future taxable amounts, one rate, beginning deferred taxes. Two temporary differences, future taxable amounts, change in rate. Reversing and permanent, future taxable amounts, no beginning balances. One temporary difference, future taxable amounts, one rate, no beginning deferred taxes, prepare statements One temporary difference, future taxable amounts, one rate, no beginning deferred taxes. One temporary difference, future taxable amounts, one rate, beginning deferred taxes. One temporary difference, future taxable amounts, change in rate. Permanent and reversing differences, calculate taxable income, entry for income taxes. One temporary difference, future deductible amounts, one rate, beginning deferred taxes. One temporary difference, future deductible amounts, one rate, beginning deferred taxes. One temporary difference, future taxable amount becomes future deductible amount, change in rate. One temporary difference, future deductible amounts, change in rate
E18-2 E18-3
E18-4 E18-5 E18-6 E18-7
E18-8 E18-9 E18-10 E18-11
E18-12
E18-13 E18-14 E18-15
E18-16 E18-17 E18-18
E18-19
Level of Difficulty
Time (minutes)
Simple
10-15
Simple Simple
20-25 20-25
Simple
10-15
Moderate Simple
15-20 10-15
Moderate
20-25
Moderate
20-25
Moderate
20-25
Simple
20-25
Simple
20-25
Simple
15-20
Simple
15-20
Simple
15-20
Simple
15-20
Simple
15-20
Simple
15-20
Moderate
20-25
Moderate
20-25
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ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item
Description
E18-20
Depreciation, temporary difference over five years, determine taxable income, taxes payable method. Deferred tax liability, change in tax rate. Two differences, no beginning deferred taxes, Multiple rates One difference, multiple rates, beginning deferred taxes, change in rates. Loss carryback and carryforward. Carryback and carryforward of tax losses. Loss carryback and carryforward. Loss carryback and carryforward using valuation allowance. Deferred tax asset, different amounts to be realized. Deferred tax asset, different amounts to be realized using valuation allowance. Three differences, classify deferred taxes. Intraperiod tax allocation. Taxes payable method-taxes payable reporting disclosures. Taxes payable method. Taxes payable method.
E18-21 E18-22 E18-23 E18-24 E18-25 E18-26 E18-27 E18-28 E18-29 E18-30 E18-31 E18-32 E18-33 E18-34
Level of Difficulty
Time (minutes)
Moderate
40-45
Complex Simple
15-20 15-20
Simple
20-25
Moderate Simple Complex Moderate
20-25 15-20 30-35 30-35
Moderate
20-25
Moderate
10-15
Simple Moderate Simple
10-15 25-30 10-15
Simple Moderate
10-15 15-20
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ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item
Description
P18-1
Three temporary differences and two permanent differences, opening balance, statement disclosure. Six differences, three years, two tax rates, income and statement of financial position reporting. Four differences, one rate, reconciliation of balances and comparative statement disclosure, reconcile tax rate. One temporary difference, tracked for four years, one permanent difference, change in rate. Second year of depreciation difference, two differences, single rate, earnings per share. Several differences, two years, reversing differences, one rate, discontinued operations and financial statements. Two differences, two years, reversing differences, two assumptions, several rates and financial statements. Three differences, several rates, two years and statement disclosure. Two differences, two rates, future income expected. Two differences, two years, calculate taxable income and pre-tax accounting income. Five differences, one year, income and retained earnings reporting, and effective tax rate. Losses carryback and carryforward expected to be realized and not expected to be realized. Prior period error correction, recovery of prior year taxes, income statement and retained earnings statements disclosure. One timing difference, change in tax rate, calculation of effective tax rate, all entries and balance sheet presentation under ASPE and IFRS
P18-2
P18-3
P18-4
P18-5 P18-6
P18-7
P18-8 P18-9 P18-10 P18-11
P18-12
P18-13
P18-14
Level of Difficulty
Time (minutes)
Moderate
30-35
Complex
45-50
Complex
50-60
Complex
50-60
Moderate
40-45
Complex
50-60
Complex
40-45
Complex
50-60
Moderate
25-30
Complex
40-50
Complex
50-60
Moderate
35-40
Moderate
35-40
Moderate
50-60
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ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item P18-15
P18-16
Description Loss carryback with timing and permanent differences and a tax rate change. The tax benefit for only half of the loss carryforward can be recognized. Journal entries and tax reconciliation note is required. Changing tax rates, fair value accounting of investment properties and revaluation method including their impact on deferred tax balances.
Level of Difficulty Complex
Moderate
Time (minutes) 60-75
20-25
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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18-1 (a)
Higher income tax expense results in lower profits.
(b) Higher income taxes paid decreases cash flow from operations. (c)
Considering only the effect of income taxes, Faber should register its company in Eastern Europe, where the company would be subject to a lower corporate income tax rate.
BRIEF EXERCISE 18-2 2017 taxable income Tax rate 12/31/2017 income tax payable
$184,000 X 25% $ 46,000
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BRIEF EXERCISE 18-3 Accounting income Permanent difference – insurance expense
$156,000 5,000
Reversing difference: CCA > Depreciation Taxable income Current income taxes at 25%
161,000 (14,000) $147,000 $ 36,750
Stmt of Fin Pos Account PP & E
(Taxable) Temporary Difference (change in) ($14,000)*
Tax X Rate 25%
Deferred Tax (Liability) (change in) ($3,500)
*Carrying amount and tax base are not given in the exercise; only the net change in the temporary difference is given. Current Tax Expense ......................................... 36,750 Income Tax Payable ................................... Deferred Tax Expense ........................................ Deferred Tax Liability .................................
36,750
3,500 3,500
BRIEF EXERCISE 18-4 (a) X(.25) = $200,000 taxes due for 2017 X = $200,000 ÷ .25 X = $800,000 taxable income for 2017 (b) Taxable income [from part (a)]................................ Excess of CCA over depreciation........................... Dividend income ...................................................... Unearned rent .......................................................... Pretax financial income for 2017.....................
$800,000 160,000 23,000 (60,000) $923,000
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BRIEF EXERCISE 18-5 The $40,000 reversing difference that occurs in the first fiscal year of Mazur Corp. results in a taxable temporary difference at December 31, 2017. The carrying amount is greater than the UCC (tax base) by $40,000. $40,000 X 30% tax rate = $12,000 deferred tax liability. Stmt of Fin Pos Account
(Taxable) Temporary Difference
PP & E
($40,000)*
Deferred Tax (Liability)
Tax X Rate 30%
($12,000)
*Carrying amount and tax base are not given in the exercise; only the net difference is provided. BRIEF EXERCISE 18-6
Accounting income Non-deductible insurance expense
$156,000 5,000
Effective tax rate ($40,250/$156,000)
Divided by Accounting @ 25% Income $39,000 25.0% 1,250 $ 40,250
0.8% 25.8% 25.8%
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BRIEF EXERCISE 18-7 (a) Basic Calculations of Capital Cost Allowance, Amounts and Balances:
Year 2017 2018
(A) CCA Base Rate $30,000 15% 25,500 30%
(B) CCA $4,500 7,650
A–B UCC $25,500 17,850
C Deprec. $6,000 6,000
Carrying Amount $24,000 18,000
C-B Reversing Difference $1,500 (1,650)
2019 2020
17,850 12,495
30% 30%
5,355 3,749
12,495 8,746
6,000 6,000
12,000 6,000
645 2,251
2021
8,746
30%
2,624
6,122
6,000
$0
3,376
(b)
Date 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
Deductible (Taxable) Tax Carrying Temporary Base Amount Difference $25,500 $24,000 $1,500 17,850 18,000 (150) 12,495 12,000 495 8,746 6,000 2,746 6,122 $0 6,122
Tax Rate 0.25 0.25 0.25 0.25 0.25
Deferred Tax Asset (Liability) $375 (38) 124 687 1,531
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Deferred Tax Asset (Liability) before Adjustment 0 375 (38) 124 686
Inc. in Deferred Tax Asset (Liability) $375 (413) 162 563 845
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
BRIEF EXERCISE 18-8 Balance Sheet Account
Tax Base
Equip.
$136,000
Carrying – Amount
(Taxable) Temporary Tax = Difference X Rate
$178,000
$(42,000)
30%
Deferred Tax = (Liability) $(12,600)
BRIEF EXERCISE 18-9 Accounting income $ 275,000 Reversing difference: CCA > Deprec. (40,000) Taxable income 235,000 X 30% Income tax payable $ 70,500 Stmt of Fin Pos Account
(Taxable) Temporary Difference
PP & E
($40,000)*
Tax X Rate 30%
Deferred Tax (Liability) ($12,000)
*Carrying amount and tax base are not given in the exercise, only the net difference is provided. Current Tax Expense ......................................... 70,500 Income Tax Payable ...................................
70,500
Deferred Tax Expense ........................................ 12,000 Deferred Tax Liability .................................
12,000
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BRIEF EXERCISE 18-10 Balance Sheet Account Warranty Liability
Tax Base –
$0
Carrying Amount
=
– (256,000)
=
Deductible Temporary Difference X
$256,000
X
Tax Rate
Deferred Tax Asset
25% =
$64,000
BRIEF EXERCISE 18-11 Current tax expense for 2017 Deferred tax benefit for 2017 Deferred tax asset, 12/31/2017 Deferred tax asset, 12/31/2016
$70,000 $62,000 40,000
Total income tax expense for 2017
(22,000) $48,000
Current Tax Expense ............................................. Income Tax Payable .......................................
70,000
Deferred Tax Asset................................................. Deferred Tax Benefit .......................................
22,000 22,000
70,000
BRIEF EXERCISE 18-12 Current tax expense for 2017 Deferred tax expense for 2017 Deferred tax liability, 12/31/2017 Deferred tax liability, 12/31/2016 Total income tax expense for 2017
$53,000 $52,000 35,000
17,000 $70,000
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BRIEF EXERCISE 18-13 Year
Future taxable amount
Rate
Deferred tax liability
2018
$53,000
25%
$ 13,250
2019
310,000
25%
77,500
2020
352,000
30%
105,600 $196,350
The increase in the tax rate from 25% to 30% in 2020 would increase the deferred tax expense and liability in 2017 by $17,600 ($352,000 x 5%).
BRIEF EXERCISE 18-14 Deferred Tax Asset......................................... Deferred Tax Benefit............................... ($3,200,000 X 5%)
160,000 160,000
BRIEF EXERCISE 18-15 Income Tax Receivable ................................... Current Tax Benefit ................................ [$120,900 + ($160,000 X 30%) = $168,900]
168,900 168,900
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BRIEF EXERCISE 18-16 Income Tax Receivable ......................................... 138,000 Current Tax Benefit ...................................... 138,000 ($460,000 X 30%) Deferred Tax Asset................................................ 36,000 Deferred Tax Benefit ..................................... [($580,000 – $460,000) X 30%]
36,000
BRIEF EXERCISE 18-17 (a) Income Tax Receivable .................................... 138,000 Current Tax Benefit ................................... ($460,000 X 30%)
(b) Income Tax Receivable .................................... 138,000 Current Tax Benefit ................................... ($460,000 X 30%) Deferred Tax Asset........................................... 36,000 Deferred Tax Benefit .................................. Deferred Tax Expense ......................................... 36,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value .... ($120,000 X 30%)
138,000
138,000
36,000
36,000
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BRIEF EXERCISE 18-18 (a) Current Tax Expense ......................................... Income Tax Payable ................................... Income Tax Payable ........................................... Current Tax Benefit .................................... ($25,000 X 30%) (b) Deferred Tax Expense ......................................... Deferred Tax Asset ...................................... Allowance to Reduce Deferred Tax Asset to Expected Realizable Value.............. Deferred Tax Benefit .................................. ($25,000 X 30%)
7,500 7,500 7,500 7,500
7,500 7,500
7,500 7,500
BRIEF EXERCISE 18-19 (a) Deferred Tax Expense ........................................ 85,000 Deferred Tax Asset .....................................
85,000
(b) Deferred Tax Expense ........................................ 85,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value….
85,000
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BRIEF EXERCISE 18-20 Unrealized Gain or Loss - OCI ........................... FV-OCI Investments....................................
9,000
Deferred Tax Asset............................................. Deferred Tax Benefit - OCI ......................... ($9,000 X 30%)
2,700
Net income Other comprehensive income: Unrealized loss, FV-OCI investments Less: Deferred tax benefit Comprehensive income
9,000
2,700
$60,000 $9,000 (2,700)
6,300 $53,700
BRIEF EXERCISE 18-21 (a) Income before income tax Income tax expense Current Deferred Net income
$230,000 $43,000 27,000
70,000 $160,000
(b) Effective tax rate = $70,000/$230,000 = 30.4%
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BRIEF EXERCISE 18-22 Income from continuing operations before income tax Income tax expense Income from continuing operations Discontinued operations: Loss from discontinued operations Less: applicable income tax savings Net income
$ 87,000 21,750 65,250 $16,000 4,000
12,000 $ 53,250
BRIEF EXERCISE 18-23 (a) Current assets Future tax asset Long-term liabilities Future tax liability
(b) Long-term liabilities Deferred tax liability
$15,000 $67,000
$52,000
BRIEF EXERCISE 18-24 Current Tax Expense ......................................... 36,750 Income Tax Payable ...................................
36,750
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SOLUTIONS TO EXERCISES EXERCISE 18-1 (10-15 minutes) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)
greater than less than 304,000 = ($76,000 divided by 25%) are not less than benefit; $15,000 $8,500 = [($100,000 X 25%) – $16,500] debit $59,000 = ($82,000 – $23,000) will not be benefit increase, increase temporary, reversing
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EXERCISE 18-2 (20-25 minutes) (a) 1.
Reversing difference. The full, estimated, three years of warranty costs reduce the current year’s pre-tax accounting income, but they will reduce taxable income in varying amounts each respective year, as paid. Assuming the estimate for each warranty is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three-year period for a given warranty. This is an example of an expense that in the first period reduces pre-tax accounting income more than taxable income and in later years, reverses. This type of temporary difference will result in future deductible amounts, which will give rise to the current recognition of a future income tax asset. Another way to evaluate this situation is to compare the carrying value of the warranty liability with its tax basis (which is zero). When the liability is settled in a future year, an expense will be recognized for tax purposes but none will be recognized for financial reporting purposes. Therefore, tax benefits for the tax deductions should result from the future settlement of the liability.
2.
Reversing difference. While the change in value is included in income in the current year, it will not be taxable/deductible until sold. Therefore, it is a reversing difference.
3.
Permanent difference. The difference is not due to different methods of depreciation, but due to different amounts accepted as “cost”. Since only the amount accepted originally as its tax cost can be amortized in the future, the difference is a permanent one. Gains recorded for accounting purposes at the disposition of the asset used on trade are deducted and losses are added to income to arrive at taxable income.
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EXERCISE 18-2 (CONTINUED) (a) (continued) 4.
Permanent difference. The investor’s share of earnings of an investee accounted for by the equity method is included in accounting income, while dividends received from taxable Canadian corporations are excluded from taxable income. The amount included in accounting income is a permanent difference deducted when computing taxable income.
5.
Reversing difference. The write down in the inventory is recognized for accounting purposes in the current year, but the loss is not allowed to be deducted for tax purposes until the inventory is sold. Hence, it is a reversing difference.
6.
Permanent and reversing difference. Any loss from a litigation accrual would not be deductible for tax purposes until paid. This is a reversing difference arising in the year accrued. The portion of the loss that is expected to be a penalty, which cannot be used as a deductible expense for tax purposes, will be a permanent difference.
7.
Reversing difference under IFRS only (ASPE does not allow the revaluation model to be used). This write down for the properties will cause the deferred tax accounts to change, but the loss is not reported for current tax purposes. Once the land and buildings are actually disposed of, the taxable income will be impacted by difference between the original cost and the proceeds on disposal. (At this time, a portion of the difference may be shown as recaptured capital cost allowance on the building and a portion as capital gains for the land, but this will not be known until the actual sale proceeds are determined.)
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EXERCISE 18-2 (CONTINUED) (a) (continued) 8.
(b) 1.
Reversing difference – When the retirement obligation is settled, the full cash amount paid will be reflected as a reduction of taxable income. However, in the accounting records, this has been reported each year since the obligation was originally accrued, along with the gain on settlement in the final year. As a result, there will be an amount in deferred tax asset with respect to this obligation. When the obligation is paid, this future tax asset will be reversed. Deferred tax accounts The estimated warranty costs will be deductible in future periods and cause taxable income to be less than accounting income in the future. Deferred tax asset (Classified as noncurrent, assuming the three-year warranty liability is classified as non-current liability) under both IFRS and ASPE.
2.
Holding/unrealized gains will be taxable when realized deferred tax liability. Holding/unrealized losses will be deductible when realized deferred tax asset. (Same treatment under ASPE and IFRS).
3.
No related deferred tax accounts. treatment under ASPE and IFRS.
Same
4.
No related deferred tax accounts. treatment under ASPE and IFRS.
Same
5.
The impairment loss will be deductible in future periods and cause taxable income to be less than accounting income in the future. Deferred tax asset (Classified as current
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under ASPE and non-current under IFRS).
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EXERCISE 18-2 (CONTINUED) (b) (continued) 6.
The penalty portion does not have related deferred tax accounts. The rest of it results in deferred tax asset. (Classified as current or non-current based on the expected reversal date under ASPE and noncurrent under IFRS).
7.
This is not allowed under ASPE. Under IFRS, the loss will be deductible in future periods and cause taxable income to be less than accounting income in the future. Deferred tax asset (or a reduction in the related future tax liability account) (Classified as noncurrent under IFRS).
8.
The cash settlement of the retirement obligation results in the current taxable income being lower than the current accounting income. As such, there will be a reduction in the future tax asset account that had been increasing in previous years as the expense was recorded for accounting purposes but not yet for tax purposes. The related future tax asset should be eliminated with this settlement.
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EXERCISE 18-3 (20-25 minutes) (a) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
12. 13.
Reversing diff. Reversing diff. Permanent diff. Permanent diff. Reversing diff. Reversing diff. Permanent diff. Permanent diff. Permanent diff. Reversing diff. Reversing diff.
Reversing diff. Reversing diff.
(b) Future deductible amounts Future deductible amounts No effect on future tax returns No effect on future tax returns Future taxable amounts Future taxable amounts No effect on future tax returns No effect on future tax returns No effect on future tax returns Future deductible amounts Unrealized gains: future taxable amounts Holding/unrealized losses: future deductible amounts Future deductible amounts Future taxable amounts
Deferred tax asset Deferred tax asset No deferred taxes No deferred taxes Deferred tax liab. Deferred tax liab. No deferred taxes No deferred taxes No deferred taxes Deferred tax asset Deferred tax liab. Deferred tax asset Deferred tax asset Deferred tax liab.
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EXERCISE 18-4 (10-15 minutes) (a)
Year
Deductible Temporary Difference at Year-End
Amount of Temporary Difference Originating or Reversing during the Year
2017 $160,000 – $245,000 = $85,000 originating 2018 $139,000 – $121,000 = $18,000 reversing 2019 $131,000 – $125,000 = $6,000 reversing
$85,000 67,000 61,000
(b
Date 12/31/2017 12/31/2018 12/31/2019
Future Deductible Amounts
Tax Rate
$85,000 67,000 61,000
30% 30% 30%
Deferred Tax Asset* $25,500 20,100 18,300
*The fact that the temporary difference will result in future deductible amounts is determined by the fact that in the year of origination, the temporary difference causes taxable income to exceed pre-tax accounting income. Therefore, in the period(s) of reversal, we can expect pre-tax accounting income to exceed taxable income. (c) 2017 Current Tax Expense ............................................. 73,500 Income Tax Payable ....................................... 73,500 [Taxable income x income tax rate ($245,000 x 30%)] Deferred Tax Asset................................................. Deferred Tax Benefit ....................................... [$85,000 x 30%0]
25,500 25,500
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EXERCISE 18-4 (CONTINUED) (c) (continued) 2018 Current Tax Expense ............................................. 36,300 Income Tax Payable ....................................... 36,300 [Taxable income x income tax rate ($121,000 x 30%)] Deferred Tax Expense ............................................ Deferred Tax Asset ......................................... [$20,100 - $25,500]
5,400 5,400
2019 Current Tax Expense ............................................. 37,500 Income Tax Payable ....................................... 37,500 [Taxable income x income tax rate ($125,000 x 30%)] Deferred Tax Expense ............................................ Deferred Tax Asset ......................................... [$18,300-$20,100]
1,800 1,800
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EXERCISE 18-5 (15-20 minutes) (a) Unrealized Gain or Loss - OCI ........................... 28,000 FV-OCI Investments.................................... Deferred Tax Asset............................................. Deferred Tax Benefit - OCI ......................... [($28,000 X 30%) – $0]
28,000
8,400 8,400
(b) FV-OCI Investments ........................................... 33,500 Unrealized Gain or Loss - OCI ................... ($28,000 + $5,500) Deferred Tax Expense - OCI .............................. 10,050 Deferred Tax Asset ..................................... Deferred Tax Liability ................................. ($5,500 X 30%) Balance, Dec. 31, 2018: ($5,500 X 30%) Balance before adjustment Adjustment to deferred tax asset/liability account and 2018 deferred tax expense - OCI
33,500
8,400 1,650
$(1,650) L 8,400 A $10,050
(c) Hang Technologies Inc. Statement of Comprehensive Income Year Ended December 31, 2018 Net income $100,000 Other comprehensive income (loss) Unrealized gains (losses) on FV-OCI 33,500 investments Less: Deferred tax (expense) benefit (10,050) Other comprehensive income (loss) 23,450 Comprehensive income $123,450
2017 $100,000 ($28,000)
8,400 (19,600) $80,400
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EXERCISE 18-5 (CONTINUED) (d) The company will report a deferred tax liability of $1,650 as a non-current liability. IFRS does not permit any deferred tax accounts to be reported in current assets or current liabilities.
EXERCISE 18-6 (10-15 minutes) (a)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
ii i iii i ii ii i iii iii i i i
(b) Add or deduct from accounting income deduct add add add deduct deduct add deduct deduct add add add
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EXERCISE 18-7 (20-25 minutes) (a) Statement of Deductible Deferred For (f) Financial Position (Taxable) Tax ASPE Account Tax Carrying Temporary Tax Asset Curr. Dec 31, 2017 Base Amount Differences Rate (Liability) or LT PP & E $980,000 $930,000 50,000 25% $ 12,500 LT Construction in Process* 350,000 500,000 (150,000) 25% (37,500) C Deferred tax liability, December 31, 2017 (25,000) Deferred tax liability before adjustment 0 Incr. in deferred tax liability, and deferred tax expense for 2017 ($ 25,000) *For the completed contract method, the construction in process account reports only construction costs excluding any gross profit recognized under the percentage-ofcompletion method. (b) Accounting income Reversing differences: Property, plant, and equipment: Depreciation expense Capital cost allowance ($1,100,000 – $980,000) Construction in Process: Gross profit—Percentage completion ($500,000 – $350,000) Gross profit—Completed contract method Taxable income Current income taxes at 25% Solutions Manual 18-29 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
$195,000
$170,000 (120,000) (150,000) 0
50,000
(150,000) $95,000 $23,750
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EXERCISE 18-7 (CONTINUED) (c) Current Tax Expense ......................................... 23,750 Income Tax Payable ...................................
23,750
Deferred Tax Expense ........................................ 25,000 Deferred Tax Liability .................................
25,000
(d)
(e)
Income before income tax Income tax expense Current Deferred Net income
Non-current liabilities Deferred tax liability
$195,000 $23,750 25,000
48,750 $146,250
$25,000
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
(f)
Refer to last two columns in table in part (a) above. Non-current assets Future tax asset Current liabilities Future tax liability
$12,500 37,500
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EXERCISE 18-8 (20-25 minutes) (a) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences PP & E $620,000 $640,000 ($20,000) a Construction in Process 760,000 940,000 (180,000) Deferred tax liability, December 31, 2018 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2018 a $350,000 + $410,000 = $760,000
Tax Rate 25% 25%
Deferred Tax Asset (Liability) ($5,000) (45,000) (50,000) (25,000) ($25,000)
(b) Accounting income Reversing differences: Property, plant, and equipment: Depreciation expense ($460,000 – $170,000) Capital cost allowance ($980,000 – $620,000) Construction in Process: Gross profit – Percentage completion ($440,000 – $410,000) Gross profit – Completed contract method Taxable income Current income taxes at 25%
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$120,000
$290,000 (360,000)
(70,000)
(30,000) 0
(30,000) $20,000 $5,000
For (f) ASPE Cur. or LT LT C
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EXERCISE 18-8 (CONTINUED) (c) Current Tax Expense ......................................... Income Tax Payable ...................................
5,000 5,000
Deferred Tax Expense ........................................ 25,000 Deferred Tax Liability .................................
25,000
(d) Income before income tax Income tax expense Current Deferred Net income
2018 $120,000
2017 $195,000
5,000 25,000 30,000 $90,000
23,750 25,000 48,750 $146,250
(e) 2018 Non-current liabilities
$50,000
2017 $25,000
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. (f) Refer to last two columns in table in part (a) above. 2018 Non-current assets Future tax asset Current liabilities Future tax liability Non-current liabilities Future tax liability
2017 $12,500
$45,000
37,500
5,000
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EXERCISE 18-9 (20-25 minutes) (a) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Sep. 15, 2018 Base Amount Differences PP & E $980,000 $930,000 $50,000 Construction in Process 350,000 500,000 (150,000) Decrease in deferred tax liability due to decrease in tax rate
Tax Rate Decrease 5% 5%
Decrease in Deferred Tax (Asset) Liability ($2,500) 7,500 $5,000
September 15, 2018 adjustment to record the impact of the decrease in tax rate on the company’s net taxable temporary difference: Deferred Tax Liability ................................. Deferred Tax Benefit ...........................
5,000 5,000
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For (g) ASPE Curr. or LT LT C
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EXERCISE 18-9 (CONTINUED) (b) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences PP & E $620,000 $640,000 ($20,000) Construction in Process 760,000 940,000 (180,000) Deferred tax liability, December 31, 2018 Sept. 15 deferred tax liability before adjustment ($25,000 – $5,000) Incr. in deferred tax liability, and deferred tax expense for 2018
Tax Rate 20% 20%
Deferred Tax Asset (Liability) ($4,000) (36,000) (40,000) 20,000 $(20,000)
(c) Accounting income Reversing differences: Property, plant, and equipment: Depreciation expense ($460,000 – $170,000) Capital cost allowance ($980,000 – $620,000) Construction in Process: Gross profit – Percentage completion ($440,000 – $410,000) Gross profit – Completed contract method Taxable income Current income taxes at 25% current rate
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$120,000
$290,000 (360,000)
(70,000)
(30,000) 0
(30,000) $20,000 $5,000
For (g) ASPE Curr. or LT LT C
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EXERCISE 18-9 (CONTINUED) (d) Current Tax Expense ......................................... Income Tax Payable ...................................
5,000 5,000
Deferred Tax Expense ........................................ 20,000 Deferred Tax Liability .................................
20,000
(e) Income before income tax Income tax expense Current Deferred * Net income
2018 $120,000
2017 $195,000
5,000 15,000 20,000 $100,000
23,750 25,000 48,750 $146,250
*Deferred tax expense for 2018 of $15,000 is comprised of a deferred tax benefit of $5,000 due to a decrease in tax rates effective September 15, 2018; and deferred tax expense of $20,000 due to differences in the period of recognition of certain expenses for accounting purposes versus for income tax purposes. (f) Non-current liabilities Deferred Tax Liability
2018
2017
$40,000
$25,000
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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EXERCISE 18-9 (CONTINUED) (g) Refer to last two columns in table in part (b) above. 2018 Non-current assets Future tax asset Current liabilities Future tax liability Non-current liabilities Future tax liability
2017 $12,500
$36,000
37,500
4,000
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EXERCISE 18-10 (20-25 minutes) (a) Unrealized Gain or Loss .................................... FV-NI Investments ...................................... FV-OCI Investments ........................................... Unrealized Gain or Loss—OCI ...................
2,000 2,000 4,000 4,000
(b) All of Christina’s investments must be reported on the statement of financial position at their fair value. The resulting difference between this and the tax base of the investments represents a temporary difference. The unrealized gain recognized is not taxable, and any unrealized loss recognized is not deductible, until the investments are sold at a gain or at a loss. The resulting taxable temporary difference must have the corresponding deferred tax recorded at the tax rate that Christina expects to pay (or recover in the case of a loss) on this gain or loss in future accounting periods. In this case the enacted rate is 30%; this rate needs to be applied to arrive at the amount of any deferred taxes.
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EXERCISE 18-10 (CONTINUED) (c) Statement of Financial Position Account Dec. 31, 2017 Equipment
Tax Base $8,500
Carrying Amount $8,000*
Deductible (Taxable) Temporary Differences $500
FV-NI Investments 60,000 58,000 2,000 FV-OCI Investments 71,000 75,000 (4,000) Deferred tax liability, December 31, 2017 Deferred tax asset/liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017 *(CCA is $10,000 X 30% X ½ year rule = $1,500)
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Tax Rate 30% 30% 30%
Deferred Tax Asset (Liability) $150 600 (1,200) (450) 0 ($450)
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EXERCISE 18-10 (CONTINUED) (d) Accounting income [excludes entries in part (a) as no tax effect] Permanent difference: 50% of meals and entertainment of $24,000 Reversing difference: Depreciation expense Capital cost allowance Taxable income Current income taxes at 25%
$110,000 12,000 122,000 $2,000 (1,500)
(e) Current Tax Expense ......................................... 30,625 Income Tax Payable ................................... Deferred Tax Asset ............................................ Deferred Tax Benefit ..................................
750
Deferred Tax Expense—OCI ............................. Deferred Tax Liability ................................. [($4,000 X 30%) – $0]
1,200
30,625
750
1,200
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500 $122,500 $30,625
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EXERCISE 18-11 (20-25 minutes) (a)
The investments must be reported on the statement of financial position at their fair value. The resulting difference between this and the tax base of the investments (cost of $314,450) represents a temporary difference. The unrealized gain recognized is not taxable, and any unrealized loss recognized is not deductible, until the investments are sold at a gain or at a loss. The resulting taxable temporary difference must have the corresponding deferred tax recorded at the tax rate that Henry expects to pay (or recover in the case of a loss) on this gain or loss in future accounting periods. In this case the enacted rate is 30% that needs to be applied to arrive at the amount of any deferred taxes.
(b) Stmt of Fin Pos Account Invest. (FV-NI)
Tax Base $314,450
(Taxable) Carrying Temporary Tax – Amount = Difference X Rate $318,200
($3,750)
30%
Deferred Tax (Liability) ($1,125)
(c) Accounting income Reversing difference: Unrealized gain on Investments (FV-NI) Taxable income Current income taxes at 30%
$302,000 (3,750) $298,250 $89,475
(d) Current Tax Expense ......................................... 89,475 Income Tax Payable ................................... Deferred Tax Expense ........................................ Deferred Tax Liability ................................. ($1,125 – opening balance of $0)
89,475
1,125 1,125
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EXERCISE 18-11 (CONTINUED) (e)
(f)
Income before income tax Income tax expense Current Deferred Net income
$302,000 $89,475 1,125
Current liabilities: Income tax payable
$89,475
Non-current liabilities: Deferred tax liability
$ 1,125
90,600 $211,400
Under IFRS, all deferred tax assets and liabilities are reported as non-current items on a classified statement of financial position.
(g)
Current liabilities: Income tax payable Future tax liability
$89,475 1,125
Current income taxes are due well within 12 months of the statement of financial position date, therefore, they are classified as a current liability. The classification for the future tax account must also be current since the temporary difference relates to an asset that is classified as current on the statement of financial position. Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories, so Henry’s future tax liability would be classified as current on a classified statement of financial position.
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EXERCISE 18-12 (15-20 minutes) (a) Statement of Deductible Financial Position (Taxable) Deferred Tax Account Tax Carrying Temporary Tax Asset Dec. 31, 2017 Base* Amount* Differences Rate (Liability) Equipment ($95,000) $0 ($95,000) 30% ($28,500) Deferred tax liability, December 31, 2017 (28,500) Deferred tax liability before adjustment 0 Increase in deferred tax liability, and deferred tax expense for 2017 ($28,500) * Values not provided in this exercise ($25,000 + $30,000 + $40,000 = $95,000) Future years Total (Taxable) temporary differences Depreciation in excess of CCA Tax rate enacted for the year Deferred tax liability
$95,000 $28,500
2018 $25,000 30% $7,500
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2019
2020
$30,000 30% $9,000
$40,000 30% $12,000
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EXERCISE 18-12 (CONTINUED) (b)
2017 $200,000 -0-
Accounting income Permanent differences: Reversing difference: CCA greater than depreciation Taxable income Current income taxes – 30%
95,000 105,000 $31,500
(c) Current Tax Expense ............................................. Income Tax Payable ....................................... Deferred Tax Expense ............................................ Deferred Tax Liability ..................................... (d) Income before income tax Income tax expense Current Deferred Net income
31,500 31,500 28,500 28,500 $200,000
$31,500 28,500
60,000 $140,000
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EXERCISE 18-13 (15-20 minutes) (a) 2018 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base* Amount* Differences Equipment ($70,000) 0 ($70,000) Deferred tax liability, December 31, 2018 Deferred tax liability before adjustment Decrease in deferred tax liability, and deferred tax benefit for 2018 *Values not provided in this exercise ($30,000 + $40,000 = $70,000)
Deferred Tax Tax Asset Rate (Liability) 30% ($21,000) (21,000) (28,500) $7,500
Future years Total (Taxable) temporary differences Depreciation in excess of CCA Tax rate enacted for the year Deferred tax liability
$70,000 $21,000
2019 $30,000 30% $9,000
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2020 $40,000 30% $12,000
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EXERCISE 18-13 (CONTINUED) (a) (continued) 2019 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2019 Base* Amount* Differences Equipment ($40,000) 0 ($40,000) Deferred tax liability, December 31, 2019 Deferred tax liability before adjustment Decrease in deferred tax liability, and deferred tax benefit for 2019 *Values not provided in this exercise Future year Total (Taxable) temporary differences Depreciation in excess of CCA Tax rate enacted for the year Deferred tax liability
$40,000 $12,000
2020 $40,000 30% $12,000
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Deferred Tax Tax Asset Rate (Liability) 30% ($12,000) ($12,000) (21,000) $9,000
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EXERCISE 18-13 (CONTINUED) (b) Pre-tax accounting income Reversing differences – CCA < depreciation expense Taxable income Taxable income Enacted tax rate Current income tax expense
2018 $ 180,000
2019 $ 180,000
25,000 $ 205,000
30,000 $ 210,000
$ 205,000 X 30% $ 61,500
$ 210,000 X 30% $ 63,000
(c) 2018 Current Tax Expense ............................................. Income Tax Payable ....................................... Deferred Tax Liability ............................................. Deferred Tax Benefit....................................... 2019 Current Tax Expense ............................................. Income Tax Payable ....................................... Deferred Tax Liability ............................................. Deferred Tax Benefit.......................................
61,500 61,500 7,500 7,500
63,000 63,000 9,000 9,000
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EXERCISE 18-13 (CONTINUED) (d) Income before income tax Income tax Current Deferred (Benefit) Net Income
Income before income tax Income tax Current Deferred (Benefit) Net Income
(e)
2018 $ 180,000 $ 61,500 (7,500)
54,000 $ 126,000 2019 $ 180,000
$ 63,000 (9,000)
54,000 $ 126,000
The net income is identical for 2018 and 2019. Although the temporary balances have changed, their changes were accrued at the expected tax rates in 2017. Subsequent reversals of balances in the temporary differences reduce the deferred tax liability account at the expected amounts each subsequent year. This trend in net income is not a coincidence. The net income remains constant due to the consistent amount of income before income tax.
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EXERCISE 18-14 (15-20 minutes) (a) 2018 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base* Amount* Differences Equipment ($70,000) 0 ($70,000) Deferred tax liability, December 31, 2018 Deferred tax liability before adjustment Decrease in deferred tax liability, and deferred tax benefit for 2018 *Values not provided in this exercise
Deferred Tax Tax Asset Rate (Liability) 25% ($17,500) (17,500) (28,500) $11,000
Future years Total
2019
(Taxable) temporary differences Depreciation in excess of CCA Tax rate enacted for the year
$70,000
$30,000 25%
$40,000 25%
Deferred tax liability
$17,500
$7,500
$10,000
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2020
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EXERCISE 18-14 (CONTINUED) (a) (continued) 2019 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2019 Base* Amount* Differences Equipment ($40,000) 0 ($40,000) Deferred tax liability, December 31, 2019 Deferred tax liability before adjustment Decrease in deferred tax liability, and deferred tax benefit for 2019 *Values not provided in this exercise Future year Total (Taxable) temporary differences Depreciation in excess of CCA Tax rate enacted for the year Deferred tax liability
$40,000 $10,000
2020 $40,000 25% $10,000
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Deferred Tax Tax Asset Rate (Liability) 25% ($10,000) (10,000) (17,500) $ 7,500
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EXERCISE 18-14 (CONTINUED) (b) Pre-tax accounting income Reversing differences – CCA < depreciation expense Taxable income
2018 $ 180,000
2019 $ 180,000
25,000 $ 205,000
30,000 $ 210,000
Taxable income Enacted tax rate Current income tax expense
$ 205,000 X 30% $ 61,500
$ 210,000 X 25% $ 52,500
(c) 2018 Current Tax Expense ......................................... Income Tax Payable ................................... Deferred Tax Liability ......................................... Deferred Tax Benefit................................... 2019 Current Tax Expense ......................................... Income Tax Payable ................................... Deferred Tax Liability ......................................... Deferred Tax Benefit...................................
61,500 61,500 11,000 11,000
52,500 52,500 7,500 7,500
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EXERCISE 18-14 (CONTINUED) (d) Income before income tax Income tax Current Deferred (benefit) Net Income
Income before income tax Income tax Current Deferred (benefit) Net Income
2018 $ 180,000 $ 61,500 (11,000)
50,500 $ 129,500 2019 $ 180,000
$ 52,500 (7,500)
45,000 $ 135,000
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EXERCISE 18-15 (15-20 minutes) (a) Accounting income Permanent differences: Non-deductible fines Reversing differences: Excess of CCA over depreciation Excess rent collected over rent earned Taxable income Current income taxes – 30%
$105,000 15,000 120,000 (16,000) 24,000 $128,000 $38,400
(b) Deductible (Taxable) Temporary Differences ($16,000)*
Deferred Tax Asset (Liability) ($4,800)
for (g) ASPE Curr. or LT LT
Statement of Fin Pos Tax Account X Rate PP & E 30% Unearned C rent revenue 24,000 30% 7,200 Deferred tax asset, Dec. 31, 2017 2,400 Deferred tax asset before adjustment 0 Incr. in deferred tax asset, and deferred tax benefit for 2017 $ 2,400 *Carrying amount and tax base are not given in the exercise, only the net difference is provided. (c) Current Tax Expense ...................................... Income Tax Payable ................................
38,400 38,400
Deferred Tax Asset ......................................... 7,200* Deferred Tax Benefit ............................... 2,400 Deferred Tax Liability .............................. 4,800* *or a net debit to Deferred Tax Asset of $2,400 Because of a flat tax rate, these totals can be reconciled: ($24,000 – $16,000) X 30% = $7,200 + ($4,800) = $2,400. Solutions Manual 18-52 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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EXERCISE 18-15 (CONTINUED) (d) Income before income tax Income tax expense Current Deferred (benefit) Net income
$105,000 $38,400 (2,400)
36,000 $69,000
(e)
Accounting income Non-deductible fines
$ 105,000 15,000
@ 30% $ 31,500 4,500 $ 36,000
Effective tax rate ($36,000/$105,000)
(f)
(g)
Non-current assets Deferred tax asset
Current assets Future tax asset Non-current liabilities Future tax liability
Divided by Accounting Income 30.0% 4.3% 34.3% 34.3%
$2,400
$7,200 4,800
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EXERCISE 18-16 (15-20 minutes) (a) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences Warranty liability 0 ($150,000) $150,000 Deferred tax asset, December 31, 2017 Deferred tax asset before adjustment Increase in deferred tax asset, and deferred tax benefit for 2017
Deferred Tax Tax Asset Rate (Liability) 25% $37,500 37,500 0 $37,500
Future years Deductible temporary difference Warranty liability Tax rate enacted for the year Deferred tax asset
Total
2018
2019
2020
$150,000
$50,000 25% $12,500
$35,000 25% $8,750
$65,000 25% $16,250
$37,500
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EXERCISE 18-16 (CONTINUED) (b)
2019 $135,000 -0-
Accounting income Permanent differences: Reversing difference: Warranty expense > warranty costs incurred Taxable income Current income taxes – 25%
150,000 285,000 $71,250
(c) Current Tax Expense ............................................. Income Tax Payable ...................................... Deferred Tax Asset................................................. Deferred Tax Benefit.......................................
(d) Income before income tax Income tax expense Current Deferred (benefit) Net income
71,250 71,250 37,500 37,500
$135,000 $71,250 (37,500)
33,750 $101,250
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EXERCISE 18-17 (15-20 minutes) (a) 2018 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences Warranty liability 0 ($100,000) $100,000 Deferred tax asset, December 31, 2018 Deferred tax asset before adjustment Decrease in deferred tax asset, and deferred tax expense for 2018
Deferred Tax Tax Asset Rate (Liability) 25% $25,000 25,000 37,500 ($12,500)
Future years Total
2019
2020
Deductible temporary difference Warranty liability Tax rate enacted for the year Deferred tax asset
$100,000 $25,000
$35,000 25% $8,750
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$65,000 25% $16,250
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EXERCISE 18-17 (CONTINUED) (a) (continued) 2019 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2019 Base Amount Differences Warranty liability 0 ($65,000) $65,000 Deferred tax asset, December 31, 2019 Deferred tax asset before adjustment Decrease in deferred tax asset, and deferred tax expense for 2019 Future year Deductible temporary difference Warranty liability Tax rate enacted for the year Deferred tax asset
Total
2020
$65,000
$65,000 25% $16,250
$16,250
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Deferred Tax Tax Asset Rate (Liability) 25% $16,250 16,250 25,000 ($8,750)
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EXERCISE 18-17 (CONTINUED) (b) 2018 $ 155,000
Pre-tax accounting income Reversing difference – Warranty costs incurred > warranty expense (50,000) Taxable income $ 105,000 Taxable income Enacted tax rate Current income tax expense
$ 105,000 X 25% $ 26,250
(c) 2018 Current Tax Expense ............................................. Income Tax Payable ...................................... Deferred Tax Expense ............................................ Deferred Tax Asset .........................................
2019 Current Tax Expense ............................................. Income Tax Payable ...................................... Deferred Tax Expense ............................................ Deferred Tax Asset .........................................
2019 $ 155,000 (35,000) $ 120,000 $ 120,000 X 25% $ 30,000
26,250 26,250 12,500 12,500
30,000 30,000 8,750 8,750
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EXERCISE 18-17 (CONTINUED) (d) Income before income tax Income tax Current Deferred Net Income
Income before income tax Income tax Current Deferred Net Income
(e)
2018 $ 155,000 $ 26,250 12,500
38,750 $ 116,250 2019 $ 155,000
$ 30,000 8,750
38,750 $ 116,250
The net income is identical for 2018 and 2019. Although the temporary balances have changed, their changes were accrued at the expected future income tax rates in 2017. Subsequent reversals of balances in the temporary differences reduce the deferred tax asset account at the expected amounts each subsequent year. This trend in net income is not a coincidence. The net income remains constant due to the consistent amount of income before income tax.
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EXERCISE 18-18 (20-25 minutes) (a) Unrealized Gain or Loss ............................... FV-NI Investments ...............................
2,000 2,000
(b) As discussed in Exercise 18-11 the difference between the carrying amount ($40,000) and the tax base ($42,000) at December 31, 2018 is a temporary difference. The loss is not deductible until the investments are sold. The resulting deductible temporary difference must have the corresponding deferred tax recorded at the tax rate that Henry expects to recover on this loss in future accounting periods. In this case the enacted rate of 30% needs to be applied to arrive at the amount of any deferred taxes. (c) Stmt of Fin Pos Account
Tax Base
Deductible Carrying Temporary Tax – Amount = Difference X Rate
Invest. (FV-NI) $42,000 $40,000 $2,000 30% Balance before adjustment Adj. to deferred tax account, and deferred tax benefit for 2018
Deferred Tax Asset (Liability) $600 (1,125) $1,725
(d) Accounting income $120,000 Reversing difference: Unrealized loss on Invest. (FVNI) 2,000 Reversing difference: 2017 Unrealized gain realized in 2018 3,750 Taxable income $125,750 Current income taxes at 30% $37,725 Current tax expense for 2018
$37,725
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EXERCISE 18-18 (CONTINUED) (e) Current Tax Expense ......................................... 37,725 Income Tax Payable ................................... Deferred Tax Asset............................................. Deferred Tax Liability ......................................... Deferred Tax Benefit ...................................
37,725
600* 1,125* 1,725
*Alternatively, if one statement of financial position account—a Deferred Tax Asset/Liability account—is used, a debit balance indicating an asset and a credit balance indicating a liability, the entry would be: Deferred Tax Asset/Liability .............................. Deferred Tax Benefit ...................................
(f)
(g)
Income before income tax Income tax expense Current Deferred (benefit) Net income
Non-current assets Deferred tax asset
1,725 1,725
$120,000 $37,725 (1,725)
36,000 $84,000
$600
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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EXERCISE 18-18 (CONTINUED) (h)
Stmt of Fin Pos Account
Tax Base
Deductible Carrying Temporary Tax – Amount = Difference X Rate
Deferred Tax Asset (Liability)
Invest. (FV-NI) $42,000 $40,000 $2,000 25% Balance before adjustment Adj. to deferred tax account, and deferred tax benefit for 2018 Current Tax Expense ......................................... 37,725 Income Tax Payable ...................................
37,725
Deferred Tax Asset............................................. 500* Deferred Tax Liability ......................................... 1,125* Deferred Tax Benefit...................................
1,625
*or Deferred Tax Asset/Liability ........................
(i)
Current assets Future tax asset
1,625
$600
The classification must be current since the temporary difference relates to an asset that is classified as current on the statement of financial position.
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$500 (1,125) $1,625
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EXERCISE 18-19 (20-25 minutes) (a) 2018 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences Warranty liability $0 ($100,000) $100,000 Deferred tax asset, December 31, 2018 Deferred tax asset before adjustment Decrease in deferred tax asset, and deferred tax expense for 2018
Deferred Tax Tax Asset Rate (Liability) 28% $28,000 28,000 37,500 ($9,500)
Future years Total
2019
2020
Deductible temporary difference Warranty liability Tax rate enacted for the year Deferred tax asset
$100,000 $28,000
$35,000 28% $9,800
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$65,000 28% $18,200
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EXERCISE 18-19 (CONTINUED) (a) (continued) 2019 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2019 Base Amount Differences Warranty liability $0 ($65,000) $65,000 Deferred tax asset, December 31, 2019 Deferred tax asset before adjustment Decrease in deferred tax asset, and deferred tax expense for 2019 Future year Deductible temporary difference Warranty liability Tax rate enacted for the year Deferred tax asset
Total
2020
$65,000
$65,000 28% $18,200
$18,200
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Deferred Tax Tax Asset Rate (Liability) 28% $18,200 18,200 28,000 ($9,800)
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EXERCISE 18-19 (CONTINUED) (b) 2018 $ 155,000
2019 $ 155,000
Pre-tax accounting income Reversing difference – Warranty costs incurred > warranty expense (50,000) Taxable income $ 105,000
(35,000) $ 120,000
Taxable income Enacted tax rate Current income tax expense
$ 120,000 X 28% $ 33,600
$ 105,000 X 25% $ 26,250
(c) 2018 Current Tax Expense ....................................... Income Tax Payable ................................. Deferred Tax Expense ...................................... Deferred Tax Asset ................................... 2019 Current Tax Expense ....................................... Income Tax Payable ................................. Deferred Tax Expense ...................................... Deferred Tax Asset ...................................
26,250 26,250 9,500 9,500
33,600 33,600 9,800 9,800
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EXERCISE 18-19 (CONTINUED) (d) Income before income tax Income tax Current Deferred Net Income
Income before income tax Income tax Current Deferred Net Income
2018 $ 155,000 $ 26,250 9,500
35,750 $ 119,250 2019 $ 155,000
$ 33,600 9,800
43,400 $ 111,600
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EXERCISE 18-20 (40-45 minutes) (a)
Basic Calculations of Capital Cost Allowance, Amounts and Balances:
Year 2017 2018 2019 2020 2021
(A) Base $600,000 480,000 288,000 172,800 103,680
(B) CCA X 40 % X .5 $ 120,000 X 40 % 192,000 X 40 % 115,200 X 40 % 69,120 X 40 % 41,472 $537,792
A–B UCC $ 480,000 288,000 172,800 103,680 62,208
(C) Deprec. $120,000 120,000 120,000 120,000 120,000
Carrying Amount $480,000 360,000 240,000 120,000 0
(b) 2017 Accounting income Reversing difference Taxable income Income tax payable
2018
$ 340,000 $340,000 -0-
(72,000)
$ 340,000 $268,000 X 30 % X 30 % $102,000 $80,400
2019
2020
2021
$340,000 $340,000 $ 340,000 4,800
50,880
78,528
$344,800 $390,880 $ 418,528 X 30 % X 30 % X 30 % $103,440 $117,264 $125,558
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C–B Reversing Difference $0 (72,000) 4,800 50,880 78,528
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EXERCISE 18-20 (CONTINUED) (c) and (d) 2017 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences Property, plant, & equipment $480,000 $480,000 0 Deferred tax asset/liability, December 31, 2017 Deferred tax asset/liability before adjustment Increase in deferred tax liability, and deferred tax expense for 2017 Current Tax Expense ......................................... 102,000 Income Tax Payable ................................... ($340,000 X 30%) part (b)
102,000
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Deferred Tax Tax Asset Rate (Liability) 30% $0 0 0 $0
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EXERCISE 18-20 (CONTINUED) (c) and (d) (continued) 2018 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences Property, plant, & equipment $288,000 $360,000 $(72,000) Deferred tax liability, December 31, 2018 Deferred tax liability before adjustment Increase in deferred tax liability, and deferred tax expense for 2018 Current Tax Expense ......................................... 80,400 Income Tax Payable ................................... ($268,000 X 30%) part (b) Deferred Tax Expense ........................................ 21,600 Deferred Tax Liability .................................
80,400
21,600
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Deferred Tax Tax Asset Rate (Liability) 30% ($21,600) (21,600) 0 ($21,600)
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EXERCISE 18-20 (CONTINUED) (c) and (d) (continued) 2019 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2019 Base Amount Differences Property, plant, & equipment $172,800 $240,000 ($67,200) Deferred tax liability, December 31, 2019 Deferred tax liability before adjustment Decrease in deferred tax liability, and deferred tax benefit for 2019 2019 Current Tax Expense ......................................... 103,440 Income Tax Payable ................................... ($344,800 X 30%) part (b) Deferred Tax Liability ......................................... Deferred Tax Benefit...................................
103,440
1,440 1,440
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Deferred Tax Tax Asset Rate (Liability) 30% ($20,160) (20,160) (21,600) $1,440
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EXERCISE 18-20 (CONTINUED) (c) and (d) (continued) 2020 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2020 Base Amount Differences Property, plant & equipment $103,680 $120,000 ($16,320) Deferred tax liability, December 31, 2020 Deferred tax liability before adjustment Decrease in deferred tax liability, and deferred tax benefit for 2020 2020 Current Tax Expense ......................................... 117,264 Income Tax Payable ................................... ($390,880 X 30%) part (b) Deferred Tax Liability ......................................... 15,264 Deferred Tax Benefit...................................
117,264
15,264
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Deferred Tax Tax Asset Rate (Liability) 30% ($4,896) (4,896) (20,160) $15,264
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EXERCISE 18-20 (CONTINUED) (c) and (d) (continued) 2021 Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2021 Base Amount Differences Property, plant, & equipment $62,208 $0 $62,208 Deferred tax asset, December 31, 2021 Deferred tax liability before adjustment Increase in deferred tax asset, and deferred tax benefit for 2021 2021 Current Tax Expense ......................................... 125,558 Income Tax Payable ................................... ($418,528 X 30%) part (b) Deferred Tax Liability ......................................... 4,896* Deferred Tax Asset............................................. 18,662* Deferred Tax Benefit...................................
Deferred Tax Tax Asset Rate (Liability) 30% $18,662 18,662 (4,896) $23,558
125,558
23,558
*Alternately, a net debit to Deferred Tax Asset/Liability of $23,558 if only one account is used.
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EXERCISE 18-20 (CONTINUED) (e) 2017 Current Tax Expense ......................................... 102,000 Income Tax Payable ................................... ($340,000 X 30%) 2018 Current Tax Expense ......................................... 80,400 Income Tax Payable ................................... ($268,000 X 30%) 2019 Current Tax Expense ......................................... 103,440 Income Tax Payable ................................... ($344,800 X 30%) 2020 Current Tax Expense ......................................... 117,264 Income Tax Payable ................................... ($390,880 X 30%) 2021 Current Tax Expense ......................................... 125,558 Income Tax Payable ................................... ($418,528 X 30%)
102,000
80,400
103,440
117,264
125,558
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EXERCISE 18-21 (15-20 minutes) (a) Future Years 2018 Current Future taxable amounts Tax rate Future tax liab.
2019 Noncurrent**
$2,400,000 $2,400,000 30% * 29% $ 720,000 $ 696,000
Total
$4,800,000 $1,416,000
*The prior tax rate of 30% is calculated by dividing the $1,440,000 balance of the future tax liability account at January 1, 2017, by the $4,800,000 temporary difference at that same date. **One-half of the instalment receivable is classified as a current asset and one-half is non-current. Therefore, under ASPE the future tax liability related to the portion of the receivable coming due in 2018 is current and the future tax liability balance related to the portion of the receivable coming due in 2019 is non-current.
(b) Under IFRS, all deferred tax balances are reported as noncurrent in a classified statement of financial position. Therefore, the non-current deferred tax liability is reported as $1,416,000.
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EXERCISE 18-21 (CONTINUED) (c) Statement of (Taxable) Financial Position Temporary Tax Differences X Account Rate Receivable ($4,800,000)* several Deferred tax liability, as revised Deferred tax liability before rate adjustment Decr. in deferred tax liability, and deferred tax benefit for 2017 from tax rate change
Deferred Tax (Liability) ($1,416,000) (1,416,000) (1,440,000) $24,000
* see part (a) for the detailed calculations Deferred Tax Liability ......................................... 24,000 Deferred Tax Benefit ...........................
24,000
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EXERCISE 18-22 (15–20 minutes) (a) Taxable income for 2017 Tax rate Income taxes payable for 2017
$520,000 30% $156,000
Current Tax Expense .............................. 156,000 Income Tax Payable ........................ 2018 Future (taxable) deductible amounts Depreciation
Future Years 2019
((($(20,000) ) Warranty liability 200,000 Enacted tax rate 30% Net deferred tax asset (($ 54,000) Net deferred tax asset before adjustment Increase in deferred tax asset
$(30,000)
Deferred Tax Asset ................................. Deferred Tax Benefit .......................
42,500
156,000 2020
Total
$(10,000) $( 60,000)) $200,000
30% $(9,000)
25% $ (2,500)
42,500
(b) IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. Non-current Assets Deferred tax liability
$
42,500
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference. Current assets Future tax asset ($200,000 x 30%)
$60,000
Long-term liabilities Future tax liability ($20,000 x 30% + $30,000 x 30% + $10,000 x 25%)
$17,500
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$ 42,500 0 $ 42,500
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EXERCISE 18-23 (20-25 minutes) (a) Future Years
Future taxable amounts Enacted tax rate Deferred tax liability
2018
2019
2020
$78,000 30% $23,400
$62,000 30% $18,600
$55,000 25% $13,750
2021
Total
$46,000 $241,000 25% $ 11,500 $ 67,250
(b) Statement of Financial Position Account Prop., plant, & equip.
(Taxable) Temporary Differences ($241,000)*
X
Tax Rate several
Deferred tax liability, Dec. 31, 2017 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017
Deferred Tax (Liability) ($67,250) (67,250) (41,000) ($26,250)
*Carrying amount and tax base are not given in the exercise, only the net difference is provided. Deferred Tax Expense ................................ 26,250 Deferred Tax Liability ..........................
26,250
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EXERCISE 18-23 (CONTINUED) (c) Future Years
Future taxable amounts Enacted tax rate Deferred tax liability
2018
2019
2020
2021
Total
$78,000 29% $22,620
$62,000 27% $16,740
$55,000 27% $14,850
$46,000 27% $12,420
$241,000
Statement of Financial Position Account Prop., plant, & equip.
(Taxable) Temporary Differences ($241,000)*
X
Tax Rate several
Deferred tax liability, revised balance Deferred tax liability before adjustment [part (b)] Decr. in deferred tax liability, and deferred tax benefit for 2018
$ 66,630
Deferred Tax (Liability) ($66,630) (66,630) (67,250) $620
*Carrying amount and tax base are not given in the exercise, only the net difference is provided. Deferred Tax Liability ......................................... Deferred Tax Benefit ...........................
620 620
Note to Instructor: The journal entry above is effective and should be made at the time the new rates were substantively enacted or, if financial statements are prepared only annually, it would be combined with other year-end adjustments for 2018 income tax that record the income tax expense.
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EXERCISE 18-24 (20-25 minutes) (a) 2014 Current Tax Expense ..................................... 32,500 Income Tax Payable ($130,000 X 25%) .
32,500
2015 Current Tax Expense ..................................... 26,250 Income Tax Payable ($105,000 X 25%) .
26,250
2016 Income Tax Receivable ................................. 58,750 Current Tax Benefit ................................ 58,750 ** (25% X ($130,000 + $105,000))
**
This leaves $305,000 - $235,000 = $70,000 of tax losses available for carryforward. No entry can be made to record any tax benefit from the remaining $70,000 of tax losses because it is not more likely than not that the company will actually benefit from them. However, the existence of the $70,000 loss carryforward should be disclosed in a note. 2017 In 2017, the company earned $50,000 of taxable income and it can deduct $50,000 of the $70,000 tax loss carryforward from this. They report a taxable income amount in 2017 of $-0-. Because they are still uncertain about being able to benefit from the remaining $20,000 of tax losses in the future, no entry is made to recognize the benefit in the year, but this amount must be disclosed in a note. Income tax expense in 2017 is $-0-. Alternatively, both a current tax expense of $50,000 X 30% = $15,000 and a current tax benefit from previously unrecognized tax losses available for carryforward of $50,000 X 30% = $15,000 could both be recognized and reported.
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EXERCISE 18-24 (CONTINUED) (b) 2014 Income (loss) before income tax Income tax expense – current Net income
$130,000 32,500 $97,500
2015 Income (loss) before income tax Income tax expense – current Net income
$105,000 26,250 $78,750
2016 Income (loss) before income tax Current tax benefit due to loss carryback Net loss
$(305,000) 58,750 $(246,250)
2017 Income (loss) before income tax Current tax expense Net income Or, alternatively: Income before income tax Current tax expense Current tax benefit from unrecognized tax losses carried forward Net income
$50,000 -0$50,000
$50,000 $15,000 (15,000)
-0$50,000
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EXERCISE 18-25 (15-20 minutes) 2014 Current Tax Expense .......................................... 20,000 Income Tax Payable ($80,000 X 25%) .........
20,000
2015 Income Tax Receivable ...................................... 48,000 ($160,000 X 30%) Current Tax Benefit ...................................
48,000
2016 The 2016 loss of $380,000 is carried back $250,000 to 2013 and $80,000 to 2014, leaving $50,000 to carry forward. Income Tax Receivable ...................................... 95,000 Current Tax Benefit ................................... ($250,000 X 30% + $80,000 X 25%)
95,000
Deferred Tax Asset............................................. 12,500 Deferred Tax Benefit................................... ($50,000 X 25%) - $-0-
12,500
2017 Current Tax Expense ......................................... 20,000 Income Tax Payable .................................. [25% X ($130,000 – $50,000 loss carryforward)] Deferred Tax Expense ........................................ 12,500 Deferred Tax Asset ..................................... ($0 – $12,500) 2018 Current Tax Expense ......................................... 36,250 Income Tax Payable ($145,000 X 25%) ......
20,000
12,500
36,250
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EXERCISE 18-26 (30-35 minutes) (a)
2015 Current Tax Expense .................................... 30,000 Income Tax Payable ($120,000 X 25%)
30,000
2016 Current Tax Expense .................................... 22,500 Income Tax Payable ($90,000 X 25%) ..
22,500
2017 The 2017 loss of $280,000 is carried back, $120,000 to 2015 and $90,000 to 2016, leaving $70,000 to carryforward. Income Tax Receivable ................................ 52,500 Current Tax Benefit ..............................
52,500**
Future Tax Asset........................................... 21,000 Future Tax Benefit ................................
21,000**
**[25% X $120,000] + [25% X $90,000] = $52,500 **30% X ($280,000 – $120,000 – $90,000) = $21,000 2018 Current Tax Expense .................................... 45,000 Income Tax Payable .............................. *[($220,000 – $70,000) X 30%] Future Tax Expense...................................... 21,000 Future Tax Asset ................................... ($0 – $21,000)
45,000**
21,000
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EXERCISE 18-26 (CONTINUED) (b) 2017 Income (loss) before income tax Income tax benefit Current benefit due to loss carryback Future benefit due to loss carryforward Net loss 2018 Income (loss) before income tax Income tax Current tax expense Future tax expense Net income
(c)
$(280,000) $52,500 21,000 ( 73,500 $(206,500)
$220,000 $45,000 21,000
66,000 $154,000
2017 Income Tax Receivable ................................ 52,500 Current Tax Benefit ..............................
52,500 **
Future Tax Asset........................................... 15,750 Future Tax Benefit ................................
15,750**
**[25% X $120,000] + [25% X $90,000] = $52,500 **30% X ($280,000 – $120,000 – $90,000) = $21,000 $21,000 X 75% = $15,750 2018 Current Tax Expense ..................................... 45,000 Income Tax Payable ............................... [($220,000 – $70,000) X 30%] Future Tax Expense....................................... 15,750 Future Tax Asset .................................... ($0 – $15,750)
45,000
15,750
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EXERCISE 18-26 (CONTINUED) (d) 2017 Income (loss) before income tax Income tax benefit Current benefit due to loss carryback Future benefit due to loss carryforward Net loss 2018 Income (loss) before income tax Income tax Current tax expense Future tax expense Net income
(e)
$(280,000) $52,500 15,750
68,250 $(211,750)
$220,000 $45,000 15,750
60,750 $159,250
Riley’s notes should include information about the unused tax loss carryforward ($21,000-$15,750), as well as supporting evidence for recognized future tax assets Note: For tax planning purposes, if the corporation anticipates profitable years ahead, it may not carry back its losses in order to take advantage of the higher rates for 2018 and beyond. The loss carryback is optional.
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EXERCISE 18-27 (30-35 minutes) (a) 2017 Income Tax Receivable ........................................ 52,500 Current Tax Benefit ..................................... [25% X $120,000] + [25% X $90,000] = $52,500 Future Tax Asset .................................................. 21,000 Future Tax Benefit ....................................... 30% X ($280,000 – $120,000 – $90,000) = $21,000 Future Tax Benefit... ............................................ Allowance to Reduce Deferred Tax Asset to Expected Realizable Value .... ($21,000 X 25%)
21,000
5,250 5,250
2018 Current Tax Expense ........................................... 45,000 Income Tax Payable ..................................... *[($220,000 – $70,000) X 30%] Future Tax Expense ............................................. 21,000 Future Tax Asset........................................... ($0 – $21,000) Allowance to Reduce Deferred Tax Asset to Expected Realizable Value ...... Future Tax Expense ...................................
52,500
45,000**
21,000
5,250 5,250
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EXERCISE 18-27 (CONTINUED) (b) 2017 Operating loss before income tax Income tax benefit Current benefit due to loss carryback Future benefit due to loss carryforward Net loss 2018 Operating income before income tax Income tax Current tax expense Future tax expense Net income (c) Current assets: Future Tax Asset
$52,500 15,750
68,250 $(211,750)
$220,000 $45,000 15,750
2017 $ 21,000
Less: Allowance to Reduce Deferred Tax Asset to Expected Realizable Value Deferred Tax Asset (net)
$(280,000)
$
60,750 $159,250
2018 -
(5,250)
-
15,750
-
(d) Both the Future Tax Asset account and the Allowance to Reduce Future Tax Asset to Expected Realizable Value account should be adjusted for the change in the enacted tax rates for 2018. This adjustment should be recorded in the accounts as soon as it is known and can be measured. (e)
The only difference is the deferred tax asset would classified as a non-current asset on the statement financial position, and a valuation allowance may not used. Instead, the Future Tax Asset account would $15,750.
be of be be
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EXERCISE 18-28 (20-25 minutes) (a) Current Tax Expense .................................. 273,600 Income Tax Payable ............................
Taxable income Enacted tax rate Income tax payable
Statement of Financial Position Account Warranty Liabilities
273,600
$912,000 X 30% $273,600
Deductible Temporary Differences $300,000*
X
Tax Rate 30%
Deferred tax asset, Dec. 31, 2017 Deferred tax asset before adjustment Incr. in deferred tax asset, and deferred tax benefit for 2017
Deferred Tax Asset $90,000 90,000 81,000 $9,000
*Carrying amount and tax base are not given in the exercise, only the net difference Deferred Tax Asset ..................................... Deferred Tax Benefit ...........................
9,000 9,000
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EXERCISE 18-28 (CONTINUED) (b) (1.) 2017 Current Tax Expense .................................. 273,600 Income Tax Payable ............................
Statement of Deductible Financial Position Temporary Differences X Account Warranty Liabilities $300,000* Less amount not likely to be realized Deferred tax asset, Dec. 31, 2017 Deferred tax asset before adjustment Decr. in deferred tax asset and deferred tax expense increase for 2017
Tax Rate 30%
273,600
Deferred Tax Asset $90,000 (25,000) 65,000 81,000 ($16,000)
*Carrying amount and tax base are not given in the exercise, only the net difference Deferred Tax Expense ................................ 16,000 Deferred Tax Asset .............................
16,000
(2.) 2018 Deferred Tax Asset ..................................... 25,000 Deferred Tax Benefit ...........................
25,000
Note to instructor: This entry would be combined with the other entries for the year that would be setting up any deferred tax asset or liability for current year activity.
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EXERCISE 18-29 (10-15 minutes) (a) Current Tax Expense ......................................... 273,600 Income Tax Payable ................................... Deferred Tax Asset............................................. Deferred Tax Benefit .................................. ($90,000 – $81,000)
273,600
9,000 9,000
Deferred Tax Expense ......................................... 25,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value ......
25,000
(b) Allowance to Reduce Deferred Tax Asset to Expected Realizable Value .............. 25,000 Deferred Tax Benefit...................................
25,000
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EXERCISE 18-30 (10-15 minutes) (a)
Temporary Difference
Resulting Deferred Tax Asset Liability
Deprec. Litigation Loss
Instalment Sale Totals
($275,000)
$91,000
_____ $91,000
Long-term liabilities Deferred tax liability ($493,000 – $91,000)
(218,000) ($493,000)
Related Stmt of Fin Pos Account
(b) (ASPE) Classification
Plant Assets
Noncurrent
Lawsuit Obligation
Current
Instalment Receivable
Noncurrent
$
402,000
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. (b) Current assets Future tax asset Long-term liabilities Future tax liability
$
91,000
493,000
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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EXERCISE 18-31 (25-30 minutes) (a)
Calculation of current income tax expense: Income from Continuing Operations Accounting income: Revenue Expenses Permanent differences: Non-taxable dividends Golf club dues Reversing differences: CCA > depreciation Litigation loss Taxable income Current income taxes for 2017 @ 30%
$273,000 216,000 57,000
Discontinued Operations $118,000 110,500 7,500
Total
$64,500
(1,700)
(1,700)
4,500
4,500
(3,700) _______ $56,100
5,100 $12,600
(3,700) 5,100 $68,700
$16,830
$3,780
$20,610
Calculation of deferred tax expense, continuing operations: Statement of (Taxable) Temporary Deferred Tax Financial Position Tax Differences X (Liability) Account Rate PP&E ($3,700)* 30% ($1,110) Deferred tax liability, Dec. 31, 2017 (1,110) Deferred tax liability before adjustment 0 Incr. in deferred tax liability, and deferred tax expense for 2017 for continuing operations ($1,110) *Carrying amount and tax base are not given in the exercise, only the net difference is provided.
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EXERCISE 18-31 (CONTINUED) (a)
Calculation of deferred tax expense, discontinued operations: Statement of Deductible Temporary Financial Position Tax Differences X Account Rate Litigation Liability $5,100* 30% Deferred tax asset, Dec. 31, 2017 Deferred tax asset before adjustment Incr. in deferred tax asset, and defered tax benefit for 2017 – for Disc. Operations
Deferred Tax Asset $1,530 1,530 0 $1,530
*Carrying amount and tax base are not given in the exercise, only the net difference is provided.
(b) Current Tax Expense ............................... Current Tax Expense – Discontinued Operations .................... Income Tax Payable .........................
16,830
Deferred Tax Expense ............................. Deferred Tax Liability .......................
1,110
Deferred Tax Asset .................................. Deferred Tax Benefit – Discontinued Operations .............
1,530
3,780 20,610
1,110
1,530
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EXERCISE 18-31 (CONTINUED) (c) Income before income tax and discontinued operations Income tax Current tax Deferred tax Income from continuing operations Income from discontinuing operations Net of applicable income tax: Current tax $3,780 Deferred tax (1,530) Net Income Earnings per share: Income from continuing operations Income from discontinuing operations Net Income (d) Non-current assets Deferred tax asset ($1,530 – $1,110)
$ 57,000 $ 16,830 1,110
17,940 39,060
7,500
2,250
5,250 $44,310
$3.91 0.52 $4.43
$420
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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EXERCISE 18-31 (CONTINUED) (e) Current assets Future tax asset Non-current liabilities Future tax liability
$1,530 1,110
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual deferred tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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EXERCISE 18-32 (15-20 minutes) (a) Current Tax Expense .................................. 89,475 Income Tax Payable ............................ (b)
Income before income tax Income tax expense Net income
(c)
Current liabilities: Income tax payable
89,475 $302,000 89,475 $212,525
$89,475
(d) Additional disclosures would include a statement that the taxes payable method is being used and a brief description of what it entails, along with: 1. income tax expense or benefit included in determining income (loss) before discontinued operations; and the amount related to transactions recognized in equity; 2. a reconciliation of the actual tax rate or expense or benefit to the statutory amount for income (loss) before discontinued operations, with information about major reconciling items; 3. the amount of reserves to be included in taxable income in each of the next five years; and the amount of unused income tax credits and losses carried forward. (e)
Henry is providing all of the necessary and relevant disclosure as mentioned in (d) above. Creditors can therefore interpret the effect of adopting the taxes payable or different method of accounting for the income tax accounts. Creditors will also understand Henry’s motivation in adopting this method. The benefits of the alternative method are likely exceeded by unnecessary and possibly excessive costs of providing the additional information.
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EXERCISE 18-33 (10-15 minutes) (a) Accounting income Permanent differences: Non-deductible fines Reversing differences: Excess of CCA over depreciation Excess rent collected over rent earned Taxable income Current income taxes – 30%
(b) Current Tax Expense ...................................... Income Tax Payable ................................
$105,000 15,000 120,000 (16,000) 24,000 $128,000 $38,400
38,400 38,400
(c)
Income before income tax Income tax expense Net income
$105,000 38,400 $66,600
(d)
Current assets Income tax receivable ($42,000 – $38,400)
$3,600
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EXERCISE 18-34 (15-20 minutes) (a) Accounting income before adjustments Add: 50% meals and entertainment Less: CCA in excess of depreciation Taxable income Income tax expense @ 30% Current Tax Expense ...................................... Income Tax Payable ................................
$185,000 10,000 (25,000) $170,000 $51,000 51,000 51,000
(b) Effective Tax Rate = $51,000/$185,000 Adjustment for permanent differences = ($10,000 x 30%)/$185,000 Adjustment for reversing differences = ($25,000 x 30%)/$185,000 Statutory Tax Rate
27.5% (1.6%) 4.1% 30.0%
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TIME AND PURPOSE OF PROBLEMS Problem 18-1
(Time 30-35 minutes)
Purpose—to test a student’s ability to differentiate between permanent and temporary differences, calculate and classify and record current and deferred taxes as well as prepare a partial income statement and statement of financial position. The student in this case is dealing with a single tax rate and opening balances to the deferred tax accounts related to a single temporary difference.
Problem 18-2
(Time 45-50 minutes)
Purpose—to test a student’s ability to calculate and classify future taxes for five temporary differences, while dealing with an opening balance in the deferred tax asset account. Student must deal with three years and two tax rates and is required to draft the income statement for the year as well as arrive at statement of financial position amounts with appropriate classifications.
Problem 18-3
(Time 50-60 minutes)
Purpose—to provide the student with an understanding of how to calculate and properly classify deferred taxes when there are four types of temporary differences. A single tax rate applies. The student is required to calculate and classify deferred taxes. Also, the student must use data given to solve for both taxable income and pre-tax accounting income. Reconciliations of reversing differences and the resulting deferred tax accounts must be prepared in order to provide proper comparative statement of financial position disclosures. Finally, the reconciliation of the effective tax rate is required.
Problem 18-4
(Time 50-60 minutes)
Purpose—to provide the student with a situation where: (1) a temporary difference originates over a three-year period and begins to reverse in the fourth period, (2) a change in an enacted tax rate occurs first in a year prior to the year in which the amount of the cumulative temporary difference originates and then second in a year in which there is a change in the amount of cumulative temporary difference, (3) the amount of originating or reversing temporary difference must be calculated each year in order to determine the cumulative temporary difference at the end of each year, and (4) there is a permanent difference along with a temporary difference each year. Journal entries are required for the first year in one instance and then for each of four years, including the entry for the adjustment of deferred taxes due to the change in the enacted tax rate. The income statement disclosure is also required for one year.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 18-5
(Time 40-45 minutes)
Purpose—to provide the student with an understanding of how future temporary differences for existing depreciable assets are considered in determining the future years in which existing temporary differences result in taxable or deductible amounts. The student is given information about pre-tax accounting income, one temporary difference, and one permanent difference. The student must calculate all amounts related to income taxes for the current year and prepare the journal entry to record them. In order to determine the beginning balance in a deferred tax account, the student must calculate deferred taxes for the prior year’s statement of financial position. An income statement and statement of financial position presentation is also required along with earnings per share disclosure.
Problem 18-6
(Time 50-60 minutes)
Purpose—to provide the student with the opportunity to reconcile timing differences reversing over a two-year period stemming from several sources, but using a consistent tax rate. Discontinued operations are also dealt with in this problem. The production of entries, income statement and statement of financial position amounts are also a requirement in this challenging problem.
Problem 18-7
(Time 40-45 minutes)
Purpose—to develop an understanding of the concept of future taxable amounts and future deductible amounts. Also, to develop an understanding of how reversing timing differences affect the calculation of deferred tax assets and liabilities when there are multiple tax rates enacted for the various periods affected by existing temporary differences. Different assumptions as to the likeliness of realization of deferred tax assets accrued from future deductible amounts are used and lead to a variety of entries and financial statement balances to be reported for two years.
Problem 18-8
(Time 50-60 minutes)
Purpose—to provide the student with the opportunity to deal with several reversing differences reversing over a two-year period with several tax rates involved. The activity of some statement of financial position accounts over the two-year period provide the necessary detail to trace the reversing timing differences. Reporting of comparative balances on the statement of income and statement of financial position at the end each of the two years must also be
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provided. A good understanding of the accounting and tax treatment is required to handle this challenging problem.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 18-9
(Time 25-30 minutes)
Purpose—to provide the student with an understanding of how the calculation and classification of deferred taxes are affected by the individual future year(s) in which future taxable and deductible amounts are scheduled to occur because of existing temporary differences. Two situations are given and the student is required to calculate, record and classify the deferred taxes for each. A net deferred tax asset results in both cases.
Problem 18-10 (Time 40-50 minutes) Purpose—to test a student’s understanding of the relationships that exist in the subject area of accounting for income taxes. The student is required to calculate and classify deferred taxes for two successive years. The journal entry to record income taxes is also required for each year. A draft of the income tax expense section of the income statement is also required for each year. An interesting twist to this problem is that the student must calculate taxable income for two individual periods based on facts about the tax rate and amount of taxes paid for each period and then combine that information with data on temporary differences to calculate pre-tax accounting income.
Problem 18-11 (Time 50-60 minutes) Purpose—to test a student’s ability to calculate, record and classify deferred taxes for three reversing differences and three permanent differences and to draft the income statement and a statement of retained earnings for the year. This problem also requires the reconciliation of the effective tax rate.
Problem 18-12 (Time 35-40 minutes) Purpose—to provide the student with a situation involving an actual net operating loss which can be partially offset by prior taxes paid using the carryback provision. Journal entries for the loss year and two subsequent years are required. The benefits of the loss carryforward are realized in the year following the loss year in one case and unexpected in another. Income statement presentations are required for the loss year where the benefits of the carryback and the carryforward are recognized and the year following the loss year where the benefits of the carryforward are realized and for the case where the loss carryforward is not expected.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 18-13 (Time 35-40 minutes) Purpose—To challenge the student to deal with an error in a prior period in a company following ASPE and using the future/deferred income taxes method of accounting. The problem also includes reversing (CCA vs depreciation and allowance for doubtful accounts) and permanent differences (income tax penalties and interest, and golf club dues). The student must consider refiling the prior year tax return as a result of the error and complete the statement of retained earnings with the after tax impact of the error shown. The student must also prepare the journal entry for the error.
Problem 18-14 (Time 50-60 minutes) Purpose—To introduce the student to accounting for commercial real estate leases and deal with the reversing differences (prepaid rent and rent payable) as well as permanent differences (golf club dues and interest expense incurred to earn income not subject to tax). The student must deal with 2 years of information, calculate income tax expense and payable for 2 years and journalize all tax entries for 2 years. Also required is tax section of income statement and comparative statements of financial position for 2 years. The question emphasizes the few differences between the deferred approach to income taxes under both ASPE and IFRS.
Problem 18-15 (Time 60-75 minutes) Purpose—To provide the students with a challenging problem that requires them to think through a number of issues: loss carryback in a situation where the company’s accounting income and taxable income has differences due to timing and permanent differences, a change in tax rate, and a loss carryforward that cannot be recognized in its entirety. Students are asked to prepare entries and the income tax rate reconciliation note.
Problem 18-16 (Time 20-55 minutes) Purpose—to provide the student with three situations and require the discussion of any impact accounting policy choices for two situations and changing tax rates in one situation will have on deferred tax balances. Fair value accounting for investment properties and the revaluation method are included in this discussion.
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SOLUTIONS TO PROBLEMS PROBLEM 18-1 (a)
Basic Calculations of Capital Cost Allowance, Amounts and Balances 2016 - 2018: C-B
(Taxable) Year
(A)
CCA
(B)
A–B
C
Base
Rate
CCA
UCC
Deprec.
Carrying Temporary Amount Difference
Reversing Difference
2016 $900,000
10%
90,000
$810,000
$75,000
$825,000
($15,000)
($15,000)
2017
810,000
20%
162,000
648,000**
150,000
675,000*
(27,000)
(12,000)
2018
648,000
20%
129,600
518,400
150,000
525,000
(6,600)
20,400
2019
518,400
20%
103,680
414,720
150,000
375,000
39,720
46,320
2020
414,720
20%
82,944
331,776
150,000
225,000
106,776
67,056
Taxable temporary difference, Dec. 31, 2016 X tax rate = Future tax liability, Dec. 31, 2016 ($825,000 – $810,000) X tax rate = $4,500 Tax rate = 30% * $900,000 – $75,000 – $150,000 = $675,000 **$900,000 – ($900,000 X 20% X 50%) – $162,000 = $648,000
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PROBLEM 18-1 (CONTINUED) (a) (continued) Statement of Financial Position Account Dec. 31, 2017 Property, plant, & equip.
Tax Carrying Base Amount $648,000* $675,000**
Deductible (Taxable) Temporary Differences ($27,000)
Prepaid rent (2018 expense) -018,750 (18,750) Prepaid rent (2019 expense) -018,750 (18,750) Warranty liability -0(4,500) 4,500 Deferred tax liability, December 31, 2017 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017
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Tax Deferred For (f)ASPE Rate Tax Current (see Asset or Longbelow) (Liability) Term 30% ($8,100) LT 30% 30% 30%
(5,625) (5,625) 1,350 (18,000) (4,500) ($13,500)
C LT C
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PROBLEM 18-1 (CONTINUED) (b) Accounting income Permanent differences: 50% of meals expense ($12,000 X 50%) Golf club fees Reversing differences: Depreciation Capital cost allowance Rent paid Rent expense Warranty expense Warranty payments Taxable income Current income taxes – 30%
$60,000 $6,000 9,000
150,000 (162,000) (56,250) 18,750 9,000 (4,500)
(c) Current Tax Expense ................................. Income Tax Payable ..........................
9,000
Deferred Tax Expense ............................... Deferred Tax Liability .........................
13,500
(d) Income before income tax Income tax Current Deferred Net income
15,000 75,000
(12,000) (37,500) 4,500 $30,000 $9,000
9,000
13,500
$60,000 $9,000 13,500
22,500 $37,500
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PROBLEM 18-1 (CONTINUED) (e)
Statement of financial position, December 31, 2017 Non-current liabilities: Deferred tax liability ($13,725 + $4,275 below)
$18,000
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. (f)
If Anthony reported under ASPE, the only difference would be in how any future tax asset or liability would be reported on the statement of financial position. Statement of financial position, December 31, 2017
Current liabilities: Future tax liability: ($5,625 – $1,350) Non-current liabilities: Future tax liability ($5,625 + $8,100)
$4,275 13,725
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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PROBLEM 18-2 (a) For non-current deferred taxes: Future taxable amounts: LT CCA vs. depreciation Tax rate enacted for the year Deferred tax liability
Deferred Tax Asset (Liability) 2018 2019 2020 ($90,000) ($50,000) ($40,000) 30% 28% 28% ($27,000) ($14,000) ($11,200)
Future taxable amounts: LT Instalment accounts receivable Tax rate enacted for the year Deferred tax liability
2018
Future deductible amounts: LT Pension liability Tax rate enacted for the year Deferred tax asset
2018 $ 30,000 30% $ 9,000
Deferred tax liability – non-current
($18,000)
2019 ($36,000) 28% ($10,080) 2019 $ 20,000 28% $ 5,600 ($18,480)
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2020 ($36,000) 28% ($10,080) 2020 $ 10,000 28% $ 2,800 ($18,480)
Total ($180,000) ($52,200) Total ($72,000) ($20,160) Total $ 60,000 $ 17,400 ($54,960)
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PROBLEM 18-2 (CONTINUED) (a) (continued) For ‘current’ Future taxes:
Deferred tax asset (liability)___
Future deductible amounts: C Unearned royalties Tax rate enacted for the year Deferred tax asset
2018 $ 76,000 30% $ 22,800
Future deductible amounts: C Various accrued expenses Tax rate enacted for the year Deferred tax asset
2018 $ 24,000 30% $ 7,200
Future taxable amounts: C Instalment accounts receivable Tax rate enacted for the year Deferred tax liability
2018 $ (36,000) 30% $ (10,800)
Deferred tax asset – current
$ 19,200
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PROBLEM 18-2 (CONTINUED) (a) (continued) Statement of
(Taxable)
Financial Position Deductible Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences PP&E (table above) * * ($180,000) -0- $72,000 (72,000) Instal. accounts receivable -0- ($60,000) 60,000 Pension liability Unearned royalties -0- ($76,000) 76,000 Accrued liabilities -0- ($24,000) 24,000 Instal. accounts receivable -0- $36,000 (36,000) Deferred tax liability, December 31, 2017 Deferred tax asset before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017 * Amounts not given in the problem Deferred Tax Expense .................................. Deferred Tax Liability ............................
65,760 65,760
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Deferred
Tax Rate Mixed Mixed Mixed 30% 30% 30%
Tax Asset (Liability) ($52,200) (20,160) 17,400 22,800 7,200 (10,800) (35,760) 30,000 ($65,760)
For (b) (ASPE) Current or LongTerm LT LT LT C C C
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PROBLEM 18-2 (CONTINUED (a) (continued) Non-current liabilities: Deferred tax liability ($54,960 – $19,200 below)
2017 $35,760
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. (b) Statement of financial position classification: Refer to last two columns in tables above and summaries. 2017 Current assets Future tax asset $19,200* Long-term liabilities Future tax liability $54,960** *($22,800 + $7,200 - $10,800 = $19,200) ** (-$52,200 - $20,160 + $17,400 = ($54,960) ASPE require that all future tax assets and liabilities be reported as either current or non-current items on a classified statement of financial position. (c)
$180,000 tax due for 2017 ÷ 30% 2017 tax rate = $600,000 taxable income for 2017.
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PROBLEM 18-2 (CONTINUED) (d)
Accounting income for 2017: Assuming that the only differences between accounting income and taxable income relate to the reversing differences given, the 2017 reversing differences are: CCA > depreciation ($90,000 + $50,000 + $40,000) Instalment gross profit > taxable amount: ($36,000 + $36,000 + $36,000) Pension expense < pension contributions, 2017: Accumulated to Dec. 31, 2017 ($30,000 + $20,000 + $10,000) $60,000 Less accumulated to Jan. 1, 2017 (100,000)* Reversing difference in year:
($180,000)
(108,000)
(40,000)
Royalties received > royalty revenues Expenses incurred > expenses paid Total reversing differences, 2017
76,000 24,000 ($228,000)
*Temporary deductible difference accumulated to January 1, 2017: $30,000 deferred tax asset ÷ 30% tax rate = $100,000
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PROBLEM 18-2 (CONTINUED) (d) (continued) Calculation of accounting income, 2017: Accounting income Reversing differences Taxable income – see part (c)
$ X (228,000) $ 600,000
Therefore, accounting income: $600,000 + $228,000 =
$ 828,000
(e) Income before income tax Income tax expense Current Deferred Net income
$828,000 $180,000 65,760*
245,760 $582,240
*This can be further divided into the deferred taxes caused by a change in the rate of tax, and those caused by changes in the temporary differences themselves: Caused by change in rate of tax: Deferred tax asset, January 1, 2017 $100,000 @ 30% Deferred tax asset, January 1, 2017 $100,000 @ 30% for 2017, 2018, and 28% for 2019, 2020: $40,000 @ 30% $12,000 $30,000 @ 30% 9,000 $20,000 @ 28% 5,600 $10,000 @ 28% 2,800
Caused by changes in temporary differences: $65,760 – $600 =
$30,000
29,400 $ 600
$65,160
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PROBLEM 18-3 (a) Excess CCA over Deprec. Future taxable amounts Tax rate enacted for the year Deferred tax liability
2018 $ 37,500 25% $ 9,375
Unearned Rent Future deductible amounts Tax rate enacted for the year Deferred tax asset
2019 $ 37,500 25% $ 9,375
2017 $20,000 30% $6,000
Statement of Financial Position Account Tax Dec. 31, 2016 Base PP&E (table above) * Unearned Rent (table above) -0Unearned Rent (table above) -0Deferred tax liability, December 31, 2016
2020 $ 37,500 25% $ 9,375
2018 $20,000 25% $ 5,000
2021 $ 37,500 25% $ 9,375
2019 $20,000 25% $5,000
Deductible (Taxable) Carrying Amount * ($20,000) ($40,000)
Temporary Differences ($150,000) 20,000 40,000
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Tax Rate 25% 30% 25%
Total $ 150,000 $ 37,500
Total $60,000 $16,000
Deferred Tax Asset (Liability) ($37,500) 6,000 10,000 ($21,500)
For (g) (ASPE) Current or LongTerm LT C LT
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PROBLEM 18-3 (CONTINUED) (b)
Calculation of effect of disposal of equipment on temporary differences: Original cost of disposed equipment $ 105,000 Accumulated Depreciation of disposed equipment (37,000) Reduction in carrying amount of equipment 68,000 Reduction in CCA pool (UCC) for proceeds 90,000 Reversing difference in 2017 22,000 CCA > depreciation, 2017 Excess of carrying amount over tax base, January 1, 2017 Excess of carrying amount over tax base, Dec.31, 2017 Carrying amount > tax base, equipment Future taxable amounts Tax rate enacted for the year Deferred tax liability Unearned Rent Future deductible amounts Tax rate enacted for the year Deferred tax asset
2018 $ 68,000 25% $ 17,000
2019 $ 68,000 25% $ 17,000
2018 $20,000 25% $5,000
$22,000 100,000 150,000 $272,000
2020 $ 68,000 25% $ 17,000
2019 $ 20,000 25% $ 5,000
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2021 $ 68,000 25% $ 17,000
Total $40,000 $10,000
Total $ 272,000 $ 68,000
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PROBLEM 18-3 (CONTINUED) (b) (continued)
Statement of (Taxable) Financial Position Deductible Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences PP&E (table above) * * ($272,000) Unearned Rent (table above) -0- ($20,000) 20,000 Unearned Rent (table above) -0- ($20,000) 20,000 LT Investment * * 75,000 Deferred tax liability, December 31, 2017 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017 *Amounts not given in the problem (c) Deferred Tax Expense .................................. 17,750 Deferred Tax Asset ....................................... 12,750* ($18,750 + $5,000 + $5,000 – op. bal. $16,000) Deferred Tax Liability ............................ 30,500* ($68,000 – op. bal. $37,500) * Alternately – net the two Deferred Tax Asset/Liability .................. 17,750 Solutions Manual 18-115 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Tax Rate 25% 25% 25% 25%
Deferred Tax Asset (Liability) ($68,000) 5,000 5,000 18,750 (39,250) (21,500) ($17,750)
For (g) (ASPE) Current or LongTerm LT C LT LT
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PROBLEM 18-3 (CONTINUED) (c) (continued) Accounting income Permanent differences: Dividends received that are not taxable Late interest penalties on tax instalments
$633,000 ($15,000) 2,880
(12,120) 620,880
Reversing differences: Gain on disposal of equipment Impairment loss on investments Excess of rent revenue over cash received ($60,000 – $40,000) CCA > Depreciation
(20,000) (100,000)
Taxable income Current income taxes at 30% current rate
$553,880 $166,164
Current Tax Expense .................................... 166,164 Income Tax Payable .............................
(22,000) 75,000
166,164
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PROBLEM 18-3 (CONTINUED) (d)
Statement of financial position classification:
Long-term liabilities Deferred tax liability
2017
2016
39,250
21,500
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. (e) Income statement presentation: Income before income tax Income tax Current tax Deferred tax Net income
$633,000 $ 166,164 17,750
183,914 $449,086
(f)
Accounting income Non-taxable dividends Non-deductible penalties
$633,000 (15,000) 2,880
Net taxable temporary differences taxed at lower 25% rate: ($272,000 – $150,000) X 5% = ($6,100) $75,000 X 5% = 3,750
@ 30% $189,900 (4,500) 864 $186,264
÷ Accounting Income 30.0% (0.7)% 0.1% 29.4%
(2,350) $183,914
Effective tax rate ($183,914 / $633,000) The effective tax rate differs from the statutory rate because there is no tax effect on the permanent differences, and because of the deferment of taxes to the future at a 25% rate rather than the current rate of 30%. Solutions Manual 18-117 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
(0.4)% 29.0% 29.0%
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PROBLEM 18-3 (CONTINUED) (g)
A company reporting under ASPE may use different terminology, but none of the calculations would differ except for the classification of the deferred tax assets and liabilities in the statement of financial position, as explained below.
Statement of financial position classification: (see tables in (a) and (b)) 2017 2016 Current assets Future tax asset $5,000 $6,000 Long-term liabilities Future tax liability 44,250 27,500 Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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PROBLEM 18-4 (a)
Before deferred taxes can be calculated, the amount of the reversing differences originating (reversing) each period and the resulting temporary difference at each year-end must be calculated:
Accounting income Permanent difference Taxable income (given) Reversing difference for the year Tax rate enacted for the year Current income tax (% X taxable income) (Taxable) temporary Difference – beginning of year (Excess) CCA in year (Taxable) temporary Difference – end of year
2017 $ 460,000 40,000 500,000 299,000 ($201,000)
2018 $ 420,000 40,000 460,000 294,000 ($166,000)
2019 $ 390,000 40,000 430,000 304,200 ($125,800)
2020 $ 460,000 40,000 500,000 644,000 $144,000
25%
30%
30%
30%
$74,750
$88,200
$91,260
$193,200
($ 0) (201,000)
($201,000) (166,000)
($367,000) (125,800)
($492,800) 144,000
($201,000)
($367,000)
($492,800)
($348,800)
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PROBLEM 18-4 (CONTINUED) (a) and (b) 2017 Statement of Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base* Amount* Differences Property, plant, & equip. ($201,000) Deferred tax liability, December 31, 2017 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017 *Amounts not given in the problem 2017 Current Tax Expense .................................... 74,750 Income Tax Payable ............................. [(refer to table in part (a)] Deferred Tax Expense .................................. 50,250 Deferred Tax Liability ............................
74,750
50,250
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Deferred Tax Tax Rate (Liability) 25% ($50,250) (50,250) 0 ($50,250)
(ASPE) Current or LongTerm LT
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PROBLEM 18-4 (CONTINUED) (a) and (b) (continued) 2018 Statement of Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base* Amount* Differences Property, plant, & equip. ($367,000) Deferred tax liability, December 31, 2018 Deferred tax liability before adjustment ($50,250 + $10,050a) Incr. in deferred tax liability, and deferred tax expense for 2018 *Amounts not given in the problem 2018 Deferred Tax Expense ................................ Deferred Tax Liability ............................
a
Deferred Tax Tax Rate (Liability) 30% ($110,100) (110,100) (60,300) ($49,800)
10,050 10,050
[To record the adjustment for the increase in the enacted tax rate recorded when known: $201,000 × (30% – 25%)] Current Tax Expense .................................... 88,200 Income Tax Payable ............................. [(refer to table in part (a)] Deferred Tax Expense .................................. 49,800 Deferred Tax Liability ............................
88,200
49,800
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(ASPE) Current or LongTerm LT
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PROBLEM 18-4 (CONTINUED) (a) and (b) (continued) 2019 Statement of Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2019 Base* Amount* Differences Property, plant, & equip. ($492,800) Deferred tax liability, December 31, 2019 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2019 *Amounts not given in the problem 2019 Current Tax Expense .................................... 91,260 Income Tax Payable ............................. [(refer to table in part (a)] Deferred Tax Expense .................................. 37,740 Deferred Tax Liability ............................
91,260
37,740
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Deferred Tax Tax Rate (Liability) 30% ($147,840) (147,840) (110,100) ($37,740)
(ASPE) Current or LongTerm LT
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PROBLEM 18-4 (CONTINUED) (a) and (b) (continued) 2020 Statement of Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2020 Base* Amount* Differences Property, plant, & equip. ($348,800) Deferred tax liability, December 31, 2020 Deferred tax liability before adjustment Decr. in deferred tax liability, and deferred tax benefit for 2020 *Amounts not given in the problem 2020 Current Tax Expense .................................... 193,200 Income Tax Payable ............................. [(refer to table in part (a)] Deferred Tax Liability .................................... 43,200 Deferred Tax Benefit .............................
193,200
43,200
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Deferred Tax Tax Rate (Liability) 30% ($104,640) (104,640) (147,840) $43,200
(ASPE) Current or LongTerm LT
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PROBLEM 18-4 (CONTINUED) (c) 2018 Income before income tax Income tax expense Current Deferred Net income *($49,800 + $10,050)
$420,000 $88,200 59,850*
148,050 $271,950
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PROBLEM 18-5 (a)
Basic Calculations of Capital Cost Allowance, Depreciation and Balances:
Year
(A – B)
(A)
(B)
Base
CCA
UCC
Deprec.
$100,000 180,000
$ 900,000 720,000
$125,000 125,000
2016 $1,000,000 X 20 % X .5 2017 900,000 X 20 %
(C)
(A – C) Carrying Amount $875,000 750,000
C-B Reversing Difference $25,000 (55,000)
(b) 2017 Statement of Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences Property, plant, & equip. $720,000 $750,000 ($30,000) Deferred tax liability, December 31, 2017 Deferred tax asset before adjustment ($25,000 X 30%) Incr. in deferred tax liability, and deferred tax expense for 2017
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Deferred Tax Tax Asset Rate (Liability) 30% ($9,000) (9,000) 7,500 ($16,500)
For (f) (ASPE) Current or LongTerm LT
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PROBLEM 18-5 (CONTINUED) (b) (continued) Calculation of current income tax expense: Accounting income Permanent difference – tax exempt interest
$ 1,400,000 (60,000) 1,340,000 55,000 1,285,000 $ 385,500
Reversing difference - [part (a)] Taxable income on regular operations Income tax expense and payable @ 30 % (c) Current Tax Expense ................................... 385,500 Income Tax Payable............................. Deferred Tax Expense ................................. Deferred Tax Liability ........................... Deferred Tax Asset .............................. * Alternately Deferred Tax Asset/Liability..................
(d) Income before income tax Income tax expense Current Deferred Net income Earnings per share: Net Income
385,500
16,500 9,000* 7,500* 16,500
$1,400,000 $385,500 16,500
402,000 $ 998,000
$9.98
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PROBLEM 18-5 (CONTINUED) (e) Net deferred tax liability at December 31, 2017. (See part (b)) Long-term liabilities Deferred tax liability (f)
$9,000
The only difference, aside from different terminology that might be used (future taxes instead of deferred taxes) would be in the classification of the deferred tax account(s) on the statement of financial position. In this case, the statement of financial position disclosure would be the same under ASPE’s future/deferred income tax method as under IFRS since all temporary differences relate to differences between the tax base and carrying amount of property, plant and equipment which are classified as noncurrent. Therefore, the deferred tax liability would be included with non-current liabilities.
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PROBLEM 18-6 (a) PP&E Bal. Dec. 31, 2016
UCC $ 998,000
Carrying Amount $ 1,256,000
For 2017 Bal. Dec. 31, 2017
(192,000) 806,000
(175,000) 1,081,000
(17,000) (275,000)
(5,100) (82,500)
Liability
For 2018 Bal. Dec. 31, 2018
(163,500) $ 642,500
(180,000) 901,000
16,500 $ (258,500)
4,950 $ (77,550)
Liability
Difference
Tax 30%
Deferred Tax
$199,500
$59,850
(131,500) 68,000 (68,000) $ -0-
(39,450) 20,400 (20,400) $ -0-
Restructuring Charges
Tax Base
Bal. Dec. 31, 2016
$ 0
For 2017 Bal. Dec. 31, 2017 For 2018 Bal. Dec. 31, 2018
0 0 0 $-0-
$
Accrued Liability $ (199,500 131,500 (68,000) 68,000 $ -0-
Difference $ (258,000)
Tax 30% $ (77,400)
Deferred Tax Liability
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Asset
Asset
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PROBLEM 18-6 (CONTINUED) (a) (continued) Profit on Property Sale Bal. Dec. 31, 2016 For 2017 (net increase) Bal. Dec. 31, 2017 For 2018 Bal. Dec. 31, 2018
Tax Base $ -0-0-0-0-0-
Carrying Amount -0$46,800 $46,800 (15,600) $31,200
Difference -0$ (46,800) (46,800) 15,600 $ (31,200)
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Tax 30% -0$ (14,040) (14,040) 4,680 $ (9,360)
Deferred Tax
Liability Liability
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PROBLEM 18-6 (CONTINUED) (b) Continuing operations: Accounting income Permanent differences: Non-deductible life insurance Non-taxable dividends Reversing differences: CCA & depreciation Restructuring charges Profit on property sale Taxable income Current income taxes – 30% Discontinued operations: Accounting income Permanent differences Reversing differences Taxable income Current income taxes – 30%
2017 $850,000
2018 $525,000
11,000 (3,250) 857,750
11,000 (3,500) 532,500
(17,000) (131,500) (46,800) 662,450 $198,735
16,500 (68,000) 15,600 496,600 $148,980
$
$
18,800 0 0 18,800 5,640
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$0 0 0 0 $0
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PROBLEM 18-6 (CONTINUED) (a) and (c) Statement of Financial
Deductible
Future
Position Account Dec. 31, 2016
(Taxable) Temporary Differences ($258,000) 199,500
Tax Asset (Liability) ($77,400) 59,850 ($17,550)
Tax Base PP&E $998,000 Restructuring Liability -0Future tax liability, December 31, 2016
Carrying Amount $1,256,000 (199,500)
Tax Rate 30% 30%
For (f)(ASPE) Current or LongTerm LT C*
*At Dec. 31/16, the total liability was expected to be current. Statement of Financial Deductible Future For (f)(ASPE) Position (Taxable) Tax Current Account Tax Carrying Temporary Tax Asset or LongDec. 31, 2017 Base Amount Differences Rate (Liability) Term PP&E $806,000 $1,081,000 ($275,000) 30% ($82,500) LT Restructuring Liability -0(68,000) 68,000 30% 20,400 C Deferred G/P on Sale (A/R) -046,800(46,800) 30% (14,040) mixed** Future tax liability, December 31, 2017 (76,140) Future tax liability before adjustment (17,550) Incr. in deferred tax liability, and deferred tax expense for 2017 $(58,590) ** 1/3 of the remaining G/P of $46,800 is expected to be realized in each of 2018, 2019, and 2020, making 30% of (1/3 X $46,800) = $4,680 a current amount, and 30% of (2/3 X $46,800) = $9,360 a long-term amount at Dec. 31/17.
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PROBLEM 18-6 (CONTINUED) (a) and (c) (continued) Statement of Financial Deductible Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences PP&E $642,500 $901,000 ($258,500) Restructuring Liability -0-0-0Deferred G/P on Sale (A/R) -031,200 (31,200) Deferred tax liability, December 31, 2018 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2018
Tax Rate 30% 30% 30%
Deferred Tax Asset (Liability) ($77,550) -0(9,360) (86,910) (76,140) ($10,770)
For (f) (ASPE) Current or LongTerm LT C mixed*
* 1/2 of the remaining G/P of $31,200 is expected to be realized in each of 2019 and 2020, making 30% of (1/2 X $31,200) = $4,680 a current amount, and 30% of (1/2 X $31,200) = $4,680 a long-term amount at Dec. 31/18.
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PROBLEM 18-6 (CONTINUED) (c)
December 31, 2017
Current Tax Expense ............................................... 198,735 Current Tax Expense – Discontinued Operations ..... 5,640 Income Tax Payable ........................................ 204,375 Deferred Tax Expense ............................................. Deferred Tax Liability ........................................
58,590 58,590
December 31, 2018 Current Tax Expense ............................................ Income Tax Payable ($495,350 X .30) ........... Deferred Tax Expense .......................................... Deferred Tax Liability .....................................
148,980 148,980 10,770 10,770
(d) Balance sheet 2017 Non-current liabilities: Deferred tax liability ($82,500 + $14,040 – $20,400)
$76,140
Balance sheet 2018 Non-current liabilities: Deferred tax liability ($77,550 + $9,360)
$86,910
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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PROBLEM 18-6 (CONTINUED) (e) Income Statement – 2017 Income from continuing operations before income tax Income tax Current tax $198,735 Deferred tax 58,590 Income from continuing operations Discontinued operations Gain on disposal of operations 18,800 Less applicable income tax 5,640 Net income Income Statement – 2018 Income before income tax Income tax Current tax Deferred tax Net income
$850,000
257,325 592,675
13,160 $605,835
$525,000 $ 148,980 10,770
159,750 $365,250
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PROBLEM 18-6 (CONTINUED) (f)
None of the calculations would change, although different terminology might be used (deferred taxes instead of future taxes). The only difference would be the classification of the deferred accounts on the statement of financial position.
Balance sheet 2017 Current assets: Future tax asset ($20,400 – $4,680) Non-current liabilities: Future tax liability ($9,360 + $82,500)
$15,720
Balance sheet 2018 Current liability: Future tax liability Non-current liabilities: Future tax liability ($4,680 + $77,550)
$4,680
91,860
82,230
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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PROBLEM 18-7 (a)
Future taxable amounts increase future taxable income relative to pre-tax accounting income due to existing taxable temporary differences. Future deductible amounts decrease future taxable income relative to pre-tax accounting income due to existing deductible temporary differences. A deferred tax liability should be recorded for the future income tax consequences attributable to the future taxable amounts scheduled and a deferred tax asset should be recorded for the future tax consequences attributable to the future deductible amounts scheduled.
(b)
See next two pages for deferred taxes. Current Tax Expense .................................. 15,000 Income Tax Payable ............................. ($50,000 taxable income X 30%)
15,000
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PROBLEM 18-7 (CONTINUED) (b) (continued) Mixed rates 2018 Future taxable amounts Tax rate enacted for the year Future tax (liability)
($75,000) 28% ($21,000) 2018
Future deductible amounts Tax rate enacted for the year Future tax asset
28% –
2019 ($75,000) 26% ($19,500) 2019 26% –
Deferred Taxes 2020 2021 ($75,000) 24% ($18,000) 2020 $2,400,000 24% $576,000
Balance (Taxable) Sheet Deductible Account Tax Carrying Temporary Dec. 31, 2017 Base* Amount* Differences Unknown* see table in (b) 0 0 ($75,000) Unknown* see table in (b) 0 0 (225,000) Unknown* see table in (b) 0 0 2,400,000 Future tax asset, December 31, 2017 Future tax asset/liability before adjustment Incr. in future tax asset, and future tax benefit for 2017 Solutions Manual 18-137 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
($75,000) 24% ($18,000) 2021
Tax Rate 28% Mixed 24%
Total ($300,000) ($76,500) Total $2,400,000
24% –
$576,000 Future Tax Asset (Liability) ($21,000) (55,500) 576,000 499,500 0 $499,500
(ASPE) Current or LongTerm C(1) LT LT
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PROBLEM 18-7 (CONTINUED) (b) (continued) *Not given in the problem (1) This assumes that either ¼ of the related balance sheet account is reported in a current classification on the balance sheet, or there is no related balance sheet account reported.
Future Tax Asset .......................................... Future Tax Benefit................................. Future Tax Liability ................................
576,000* 499,500 76,500*
*Alternately Future Tax Asset/Liability..............................
(c)
499,500
I might be concerned that the company will not generate enough taxable income in the future from which to deduct the future deductible amounts. If this were the case, their future deductibility would not qualify as having asset value. To the extent that the deferred tax asset will not be realized, an allowance to reduce the deferred tax asset account to the expected realizable value should be created. It becomes a valuation account, which will then ensure that the asset is reduced to the realizable value for financial statement reporting purposes. The use of the allowance account is optional. An alternative approach would be to establish a deferred tax asset only for the portion of the future taxes estimated more likely than not to be realized.
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PROBLEM 18-7 (CONTINUED) (d) Future Tax Expense ............................................. 480,000 Allowance to Reduce Future Tax Asset to Expected Realizable Value ............ ($2,000,000 X 24% = $480,000)
480,000
(e) 2020 Future deductible amounts Tax rate enacted for the year Future tax asset (net)
$600,000 24% $144,000
Future Taxes 2021
Total
$1,500,000 $2,100,000 24% $360,000 $504,000
Temporary difference – future deductible amount: Required balance (net above) Opening balance recorded in 2017 Required balance in allowance Allowance to Reduce Future Tax Asset to Expected Realizable Value ............ Future Tax Benefit ........................................ ($480,000 – $72,000 = $408,000)
$504,000 576,000 $ 72,000
408,000 408,000
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PROBLEM 18-7 (CONTINUED) (f) 2018 mixed rates
2019
Future taxable amounts Tax rate enacted for the year Future tax (liability)
($75,000) 26% ($19,500) 2019
Future deductible amounts Tax rate enacted for the year Future tax asset
26%
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Future Taxes 2020 2021 ($75,000) 24% ($18,000)
Total
($75,000) 24% ($18,000)
($225,000)
2020 2021 $600,000 $1,500,000 24% 24% $144,000 $360,000
Total $2,100,000
Balance (Taxable) Sheet Deductible Account Tax Carrying Temporary Dec. 31, 2018 Base* Amount* Differences Unknown* see table above 0 0 ($75,000) Unknown* see table above 0 0 (150,000) Unknown* see table above 0 0 2,100,000 Future tax asset, December 31, 2018 Future tax asset (net) before adjustment ($499,500 – $480,000) Incr. in future tax asset, and future tax benefit (net) for 2018 * Not given in the problem
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Tax Rate 26% 24% 24%
($55,500)
$504,000 Future Tax Asset (Liability) ($19,500) (36,000) 504,000 448,500 19,500 $429,000
(ASPE) Current or LongTerm C LT LT
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PROBLEM 18-7 (CONTINUED) (f) (continued) Balance sheet classification Refer to last two columns in tables in part (b) and (f) above. 2018 Non-current assets Future tax asset (net of allowance) Current liabilities Future tax liability
2017
$468,0002
$40,5001
19,500
21,000
1
Balance of Deferred Tax accounts December 31, 2017: Future tax asset – LT $ 576,000 Less: Allowance to reduce future tax asset to expected realizable value-part (d) (480,000) 96,000 Less: Future tax liability – LT (55,500) Net deferred tax asset – non-current $40,500 2
Balance of Deferred Tax accounts December 31, 2018: Future tax asset – LT $576,000 Less: Allowance to reduce future tax asset to expected realizable value-part (e) (72,000) 504,000 Less: Future tax liability – LT (36,000) Net deferred tax asset – non-current $468,000
If the company did not use the allowance method, the amounts reported for the future tax asset account would have been reported on the balance sheet as the same net amount as indicated above. If no allowance is used, only the realizable amount is recognized initially. Solutions Manual 18-141 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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PROBLEM 18-7 (CONTINUED) (g) 2018 Non-current assets Deferred tax asset 1 2
$448,5002
2017 $19,5001
See calculations in (f) above: $40,500 – $21,000 See calculations in (f) above: $468,000 – $19,500
Note that strict application of IFRS would require that no allowance account be used. Instead, a deferred tax asset would be recognized only to the extent that it is probable that taxable income will be available against which the deductible temporary difference can be used. Also, IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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PROBLEM 18-8 (a)
2016 balances with mixed tax rates: Future taxable amounts: CCA vs. depreciation Tax rate enacted for the year Deferred tax liability
2017 ($17,500) 30% ($5,250)
Deferred Taxes 2018 2019 ($12,500) ($2,500) 29% 28% ($3,625) ($700)
Future deductible amounts Pension liability Tax rate enacted for the year Deferred tax asset
2017 12,000 30% $ 3,600
2018 12,000 29% $ 3,480
Statement of Financial Position Account Tax Carrying Dec. 31, 2016 Base Amount Property, plant, & equipment $67,500 $100,000 Warranty Liability -0- (20,500) Pension Liability -0- (38,800) Deferred tax asset, December 31, 2016
Deductible (Taxable) Temporary Differences ($32,500) 20,500 38,800
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2019 14,800 28% $ 4,144
Tax Rate
Total ($32,500) ($9,575) Total 38,800 $ 11,224
Deferred Tax Asset (Liability)
Mixed ($9,575) (1) 30% 6,150 Mixed 11,224 (1) $7,799
For (e) ASPE Current or LongTerm LT C LT
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PROBLEM 18-8 (CONTINUED) (a) (continued) (1) from table above
Statement of financial position classification: Non-current assets: Deferred tax asset ($6,150 + $11,224 – $9,575)
$7,799
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
(b)
2017 future taxes – mixed tax rates Future taxable amounts: CCA vs. Depreciation Tax rate enacted for the year Deferred tax liability
Deferred Taxes 2018 2019 ($12,500) ($2,500) 29% 28% ($3,625) ($700)
Future deductible amounts Pension liability Tax rate enacted for the year Deferred tax asset
2018 12,000 29% $ 3,480
2019 14,800 28% $ 4,144
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Total ($15,000) ($4,325) Total 26,800 $ 7,624
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PROBLEM 18-8 (CONTINUED) (b) (continued) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences Property, plant, & equipment * * ($15,000) Warranty Liability -0- (23,480) 23,480 Pension Liability -0- (26,800) 26,800 Deferred tax asset, December 31, 2017 Deferred tax asset before adjustment Incr. in deferred tax asset, and deferred tax benefit for 2017 * not given in the problem
Tax Rate Mixed 29% Mixed
(1) from table above
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Deferred Tax Asset (Liability) ($4,325) 6,809 7,624 10,108 7,799 $2,309
(1) (1)
For (e) Current or LongTerm LT C LT
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PROBLEM 18-8 (CONTINUED) (c) Calculation of current tax expense 2017: Accounting income Permanent difference – dividends Permanent difference – golf dues Reversing differences Warranty Expense Warranty Payments (21 Pension Expense Recognized Tax Deductible Pension Payments Depreciation > CCA Taxable income Current income taxes – 30% *($21,200 +$6,300 = $27,500)
$ 119,650 (5,800) 25,000 138,850 $30,480 (27,500)* 61,000 (72,000)
Current Tax Expense ........................................... 44,499 Income Tax Payable ..................................... Deferred Tax Asset .............................................. Deferred Tax Benefit.....................................
2,980 (11,000) 17,500 $148,330 $44,499
44,499
2,309 2,309
(d) Income statement presentation 2017: Income before income tax Income tax Current tax Deferred tax (benefit) Net income
$119,650 $ 44,499 (2,309)
42,190 $ 77,460
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PROBLEM 18-8 (CONTINUED) (d) (continued) Statement of financial position classification: Non-current assets: 2017 Deferred tax asset $10,1081 Current liabilities: Income tax payable [$44,499 – (4 X $9,500)] 1 2
$6,499
2016 $7,7992
not given
$6,809 + $3,299 $6,150 + $1,649
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
(e)
From part (a) Statement of financial position classification:
Current assets: Future tax asset Non-current assets Future tax asset ($11,224 – $9,575)
$6,150
$1,649
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PROBLEM 18-8 (CONTINUED) (e) (continued) From part (d) Statement of financial position classification: Current assets: Future tax asset
2017 $6,809
2016 $6,150
Non-current assets: Future tax asset ($7,624 – $4,325)
$3,299
$1,649
Current liabilities: Income tax payable [$44,499 – (4 X $9,500)]
$6,499
not given
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference. In addition, although none of the calculations would change (except for the classification described above), companies applying ASPE may use different terminology—that is, future income tax accounts instead of deferred tax accounts.
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PROBLEM 18-9 Part 1 (a) Mixed tax rates Alia
Future taxable amounts Tax rate enacted for the year Deferred tax (liability)
2018
2019
Future Years 2020 2021
($600) 25% ($150)
($600) 25% ($150)
($600) 25% ($150)
2019
Future Years 2020 2021
2018 Future deductible amounts Tax rate enacted for the year Deferred tax asset
25% -
25% -
25% -
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($400) 30% ($120)
$3,600 30% $1,080
2022 ($200) 30% ($60)
2022
Total ($2,400) ($630)
Total $3,600
30% -
$1,080
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PROBLEM 18-9 (CONTINUED) Part 1 (continued) (a) (continued) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base* Amount* Differences Property, plant, & equipment ($2,400) Litigation liability 3,600 Deferred tax asset (net), December 31, 2017 Deferred tax liability before adjustment Increase in deferred tax asset, and deferred tax benefit for 2017 * not given in the problem
Deferred Tax Tax Asset Rate (Liability) Mixed ($630) 30% 1,080 450 (1,000) $1,450
Alia will report a Deferred Tax Asset of $450 in non-current assets on the statement of financial position.
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PROBLEM 18-9 (CONTINUED) Part 1 (continued) (b) Current Tax Expense ........................................... Income Tax Payable..................................... ($8,000 X 25%) Deferred Tax Liability ........................................... Deferred Tax Asset ……………………………… .. Deferred Tax Benefit ....................................
2,000 2,000 1,000* 450* 1,450
*Alternately: one debit to Deferred Tax Asset/Liability for $1,450
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PROBLEM 18-9 (CONTINUED) Part 2 (a)
Mixed tax rates
Khoi 2018 Future taxable amounts Tax rate enacted for the year Deferred tax (liability)
($800) 25% ($200)
2018 Future deductible amounts Tax rate enacted for the year Deferred tax asset
25% –
2019 ($800) 25% ($200)
2019
25% –
Future years 2020 ($800) 25% ($200) Future years 2020 $6,000 25% $1,500
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2021
Total
($800) ($3,200) 30% ($240) ($840)
2021
Total $6,000
30% –
$1,500
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PROBLEM 18-9 (CONTINUED) Part 2 (continued) (a) (continued) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base* Amount* Differences Property, plant, & equipment ($3,200) Litigation liability 6,000 Deferred tax asset, December 31, 2017 Deferred tax asset before adjustment Decrease in deferred tax asset, and deferred tax expense for 2017 *not given in the problem (b) Current Tax Expense ........................................... Income Tax Payable..................................... ($8,000 X 25%) Deferred Tax Expense ......................................... Deferred Tax Asset ......................................
2,000 2,000 540 540
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Tax Rate Mixed 25%
Deferred Tax Asset (Liability) ($840) 1,500 660 1,200 $540
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PROBLEM 18-9 (CONTINUED) (c)
Part 1 – All statement of financial position deferred tax accounts are presented as non-current, regardless of origin. Alia Corp. Statement of Financial Position (partial) December 31, 2017 Non-current assets Deferred tax asset
$450
Part 2 – All statement of financial position deferred tax accounts are presented as non-current, regardless of origin. Khoi Corp. Statement of Financial Position (partial) December 31, 2017 Non-current assets Deferred tax asset (d)
$660
Under ASPE, the classification is contingent on the balance sheet classification of the temporary difference underlying the future tax amount. In both cases, the property, plant and equipment and the litigation liability are non-current items, so all the future tax accounts would also be presented as non-current. Therefore, there would be no difference, except for a possible use of different terminology (future taxes instead of deferred taxes).
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PROBLEM 18-10 (a)
Basic Calculations of Capital Cost Allowance, Depreciation and Balances:
Year 2017 2018
(A) Base $400,000 X 25 % X .5 350,000 X 25 %
(B) CCA $ 50,000 87,500
A–B UCC $ 350,000 262,500
(C) Deprec. $80,000 80,000
Carrying Amount $320,000 240,000
C–B Reversing Difference $30,000 (7,500)
(b) 2017 Statement of Financial Position Deductible Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences Property, plant, & equip. $350,000 $320,000 $30,000 Deferred tax asset, December 31, 2017 Deferred tax account before adjustment Incr. in deferred tax asset, and deferred tax benefit for 2017
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Deferred Tax Tax Rate Asset 30% $9,000 9,000 0 $9,000
(j) (ASPE) Current or LongTerm LT
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PROBLEM 18-10 (CONTINUED) (c) Deferred Tax Asset ....................................... Deferred Tax Benefit ............................
9,000 9,000
Current Tax Expense .................................... 105,000 Income Tax Payable ............................. (amount given in the problem)
105,000
$105,000 tax due for 2017 ÷ 30% (2017 tax rate) = $350,000 taxable income for 2017.
(d) Income before income tax Income tax expense Current Deferred (benefit) Net income a
$320,000a $105,000 (9,000)
Pre-tax accounting income Excess depreciation per books [from (a) above] Taxable income [from (c) above]
96,000 $224,000 $
X 30,000 $350,000
Solving for X; X + $30,000 = $350,000; X = $320,000 pre-tax accounting income.
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PROBLEM 18-10 (CONTINUED) (e)
2018 Statement of Financial Position Deductible Deferred Account Tax Carrying Temporary Tax Tax Dec. 31, 2018 Base Amount Differences Rate Asset Property, plant & equip. $262,500 $240,000 $22,500 30% $6,750 Unearned Rev. – current -0-* (75,000) 75,000 30% 22,500 Unearned Rev. – non-curr. -0-* (75,000) 75,000 30% 22,500 Deferred tax asset, December 31, 2018 51,750 Deferred tax asset before adjustment 9,000 Incr. in deferred tax asset, and deferred tax benefit for 2018 $42,750 *$150,000 unearned at end of 2018 divided by 2 years (2019 and 2020)
(f) Deferred Tax Asset ....................................... 42,750 Deferred Tax Benefit ............................. Current Tax Expense .................................... 84,000 Income Tax Payable ............................. (amount given in the problem)
42,750
84,000
$84,000 tax due for 2018 ÷ 30% (2017 tax rate) = $280,000 taxable income for 2018
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(j) (ASPE) Current or LongTerm LT C LT
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PROBLEM 18-10 (CONTINUED) (g) Income before income tax Income tax expense Current Deferred (benefit) Net income
$137,500d $84,000 (42,750)
d
Pre-tax accounting income CCA in excess of depreciation [from (a) above] Excess rent collected over rent earned Taxable income [from (f) above]
41,250 $ 96,250 $
X (7,500) 150,000 $280,000
Solving for X: X + $150,000 – $7,500 = $280,000 X = $137,500 pre-tax accounting income.
(h) Refer to last column in tables of part (a) and (e) above.
Non-current assets Deferred tax asset ($22,500 + $22,500 + $6,750)
2018
2017
$51,750
$9,000
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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PROBLEM 18-10 (CONTINUED) (i)
When financial statements of several legal entities are consolidated into one for financial reporting purposes, the possibility exists that deferred tax accounts on the individual statements of financial position could be related to taxes from different jurisdictions. Since there is no right to offset taxes between jurisdictions, there is a possibility of having more than one account for deferred taxes reported on a statement of financial position (one for each legal entity). Under ASPE, there could also be one current and one long term deferred tax asset/liability account for each legal entity.
(j)
Refer to last column in tables of part (a) and (e) above. 2018
Current assets Future tax asset Non-current assets Future tax asset *($22,500 + $6,750)
2017
$22,500 29,250*
$9,000
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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PROBLEM 18-11 (a) Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2017 Base Amount Differences Warranty liability -0(3,000) $3,000 Construction in process 270,000* 300,000 (30,000) Property, plant, & equipment 220,000 240,000 (20,000) Land not given not given 34,500** Deferred tax liability, December 31, 2017 Deferred tax liability before adjustment Incr. in deferred tax liability, and deferred tax expense for 2017 *(Construction costs $270,000 + Gross profit $30,000) **$46,000 X 75% Total deferred tax liability—2017 Deferred tax benefit—$10,350 Increase in liability and deferred tax expense
($15,000) 10,350 ($ 3,750)
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Tax Rate 30% 30% 30% 30%
Deferred Tax Asset (Liability) $900 (9,000) (6,000) 10,350 (3,750) 0 ($3,750)
for (h) (ASPE) Current or LongTerm C C LT LT
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PROBLEM 18-11 (CONTINUED) (b)
Accounting income Permanent difference: Non-taxable dividends Non-deductible fines Non-deductible loss in land value $46,000 X 25% Reversing differences: Warranties: excess of expense over claims paid ($15,000 – $12,000) Property, plant, and equipment: excess of CCA over depreciation expense ($80,000 – $60,000) Construction in Process: Excess of reported construction profit over completed contract method ($30,000 – $0) Loss on land not deductible until future years Taxable income Current income taxes at 30%
Net income $64,000
Retained Earnings ($5,700)
(1,400) 3,500
Total $58,300 (1,400) 3,500
11,500
11,500
3,000
3,000
(20,000)
(20,000)
(30,000)
(30,000)
34,500 $65,100 $19,530
_______ ($5,700) ($1,710)
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34,500 $59,400 $17,820
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PROBLEM 18-11 (CONTINUED) (c) Current Tax Expense. .......................................... 19,530 Income Tax Payable ..................................... Retained Earnings (tax effect) ...................... Deferred Tax Expense ........................................ Deferred Tax Liability ....................................
17,820 1,710
3,750 3,750*
*Alternately, if a company kept a separate deferred tax account for each temporary difference: Deferred Tax Expense ......................................... 3,750 Deferred Tax Asset (Warranty) ............................. 900 Deferred Tax Asset (Land writedown) .................. 10,350 Deferred Tax Liability (C.I.P.)........................ Deferred Tax Liability (PP&E) .......................
9,000 6,000
(d) Income statement presentation: Income before income tax Income tax Current tax Deferred tax Net income
$64,000 $19,530 3,750
23,280 $40,720
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PROBLEM 18-11 (CONTINUED) (e) Statement of Retained Earnings Balance January 1, 2017 Add: Net income Less: Financing charge Less applicable tax Balance December 31, 2017
(f)
Statement of Financial Position Current liabilities Income tax payable Non-current liabilities Deferred tax liability ($8,100 – $4,350)
-0$40,720 ($5,700) 1,710
(3,990) $36,730
$17,820 3,750
IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.
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PROBLEM 18-11 (CONTINUED) (g)
Accounting income Non-taxable dividends Non-deductible fines Non-deductible land writedown
$64,000 (1,400) 3,500 11,500
@ 30% 19,200 (420) 1,050
Divided by Accounting Income 30.0% (0.7)% 1.6%
3,450 23,280
5.4% 36.3%
Effective tax rate ($23,280 / $64,000)
36.3%
The effective tax rate differs from the statutory rate in this case because of the effect of the permanent differences of dividends, fines and 25% of the loss due to writedown of land.
(h)
Statement of Financial Position Refer to last two columns of table in (a). Non-current assets Future tax asset ($10,350 – $6,000) Current liabilities Income tax payable Future tax liability ($9,000 – $900)
$4,350 17,820 8,100
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.
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PROBLEM 18-12 (a) 2016 Income Tax Receivable—2013 ............................ 6,250 ($25,000 X 25%) Income Tax Receivable—2014 ............................ 15,000 ($60,000 X 25%) Income Tax Receivable—2015 ............................ 24,000 ($80,000 X 30%) Current Tax Benefit.......................................
45,250
Note: An acceptable alternative is to record only one Income Tax Receivable account for the amount of $45,250. Future Tax Asset .......................................... 13,500 Future Tax Benefit ................................ 13,500 ($210,000 – $25,000 – $60,000 – $80,000 = $45,000) ($45,000 X 30% = $13,500) [Note: The solution assumes that Carly follows ASPE].
2017 Current Tax Expense .................................... Income Tax Payable ............................. [($70,000 – $45,000) X 30%]
7,500
Future Tax Expense ..................................... 13,500 Future Tax Asset ................................... ($13,500 – $0)
2018 Current Tax Expense .................................... 22,500 Income Tax Payable ($90,000 X 25%) ..
7,500
13,500
22,500
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PROBLEM 18-12 (CONTINUED) (b)
An income tax receivable account totalling $45,250 will be reported under current assets on the statement of financial position at December 31, 2016. This type of receivable is usually listed immediately above inventory in the current asset section. This receivable is normally collectible within two months of filing the amendment to the tax returns reflecting the carryback. Under ASPE, a future tax asset of $13,500 should also be classified as a current asset because the benefits of the loss carryforward are expected to be realized in the year that immediately follows the loss year, which means the benefits are expected to be realized in 2017. A current future tax asset is usually listed at or near the end of the list of current assets on the balance sheet. Also, retained earnings is increased by $58,750 ($45,250 + $13,500) as a result of the entries to record the benefits of the loss carryback and the loss carryforward. If Carly Inc. reports under IFRS, the deferred tax asset related to the loss carryforward would be classified as a non-current asset on the statement of financial position.
(c) 2016 Income Statement Operating loss before income tax Income tax benefit Current benefit due to loss carryback $45,250 Future benefit due to loss carryforward 13,500 Net loss
($210,000)
58,750 ($151,250)
(d) 2017 Income Statement Income before income tax Income tax expense Current $7,500a Future 13,500 Net income a [($70,000 – $45,000) X 30%]
$70,000
21,000 $49,000
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PROBLEM 18-12 (CONTINUED) (e) 2016 Income Tax Receivable—2013 ............................ 6,250 ($25,000 X 25%) Income Tax Receivable—2014 ............................ 15,000 ($60,000 X 25%) Income Tax Receivable—2015 ............................ 24,000 ($80,000 X 30%) Current Tax Benefit.......................................
45,250
Note: An acceptable alternative is to record only one Income Tax Receivable account for the amount of $45,250. Although its related possible income tax benefit is not recognized in the accounts, Carly Inc. has a tax loss carryforward of $45,000 which is required to be disclosed.
2017 Current Tax Expense .................................... Income Tax Payable ............................. [($70,000 – $45,000) X 30%]
7,500
2018 Current Tax Expense .................................... 22,500 Income Tax Payable ($90,000 X 25%) ..
(f)
7,500
22,500
2016: entry for current taxes – no change 2016: if a valuation allowance is used, the full income tax benefit and future tax asset related to the tax loss carryforward is recognized and then offset by the allowance, as follows. Future Tax Asset .......................................... 13,500 Future Tax Benefit ................................ ($45,000 X 30% = $13,500)
13,500
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PROBLEM 18-12 (CONTINUED) (f) (continued) Future Tax Expense ..................................... 13,500 Allowance to Reduce Future Tax Asset to Expected Realizable Value ($13,500 – $0)
13,500
2017: entry for current taxes – no change 2017: because the tax loss carryforward has now been used, both the amount in the future tax account and in its allowance account must be removed, as follows.
Future Tax Expense .................................... 13,500 Future Tax Asset ................................
13,500
Allowance to Reduce Future Tax Asset to Expected Realizable Value ........ 13,500 Future Tax Benefit ................................
13,500
Alternatively, one entry could have been made: Allowance to Reduce Future Tax Asset to Expected Realizable Value ........ 13,500 Future Tax Asset ................................
13,500
2018: No change to part (e) entry.
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PROBLEM 18-12 (CONTINUED) (g) 2016 Income Statement Operating loss before income tax Income tax benefit Current benefit due to loss carryback Net loss
2017 Income Statement Income before income tax Income tax expense – Current a Net income a [($70,000 – $45,000) X 30%]
(h)
($210,000) 45,250 ($164,750)
$70,000 7,500 $62,500
Using the valuation allowance instead of applying the reduction in value directly does not have any impact on cash flows. The use of the contra allowance simply permits the recording of the full benefits associated with all future deductible amounts in the asset account. This facilitates tracking for management purposes. It has no use for financial reporting purposes except, perhaps, for the transparency of the information. Readers can see the total possible benefits and the extent to which management has judged they will not be realized. Use of the allowance has no impact on cash flows.
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PROBLEM 18-13 (a)
$135,000 x 30% = $40,500, deferred tax liability, December 31, 2016.
(b)
The prior period error has the following effect on the December 31, 2016 statement of financial position: The land is understated by $40,000, retained earnings is understated by the $40,000 error in the expenses on the 2016 income statement and overstated by the income tax effect (30% of $40,000 = $12,000), and the income tax payable account is understated by $12,000. Land Retained Earnings Retained Earnings Income Tax Payable To recognize additional income tax payable on the amount deducted in error in 2016. (2016 tax return is amended)
40,000 40,000 12,000 12,000
(c) Accounting Income Add: Golf club dues Non deductible interest costs Depreciation expense Excess of year’s bad debt expense over tax deductible amount Less: CCA Taxable Income
$1,645,000 4,500 2,500 365,000 20,000 (300,000) $1,737,000
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PROBLEM 18-13 (CONTINUED) (c) (continued) Asset / Liability
Property, plant, and equipment
Tax Base
$933,000*
Carrying Amount
$1,352,000 + $16,000 – $365,000 = $1,003,000 not given
Deductible / (Taxable) Temporary Difference
Tax Deferred Rate Tax (Liability) Asset
$ (70,000) 30%
$ (21,000)
Allowance not given 20,000 30% for doubtful accounts Deferred tax liability, Dec. 31, 2017 Balance before adjustment Adjustment required to deferred tax liability, and deferred tax benefit, 2017
6,000
*Carrying amount, Dec. 31, 2016 Future taxable amount, Dec. 31, 2016 UCC, Dec. 31, 2016 2017 addition to class Less 2017 CCA UCC, Dec. 31, 2017
$(15,000) (40,500) $ 25,500
$1,352,000 ( 135,000) 1,217,000 16,000 (300,000) $ 933,000
Current tax expense = $1,737,000 x 30% = $521,100 Deferred tax expense = $25,500 (benefit) Total income tax expense = $521,100 - $25,500 = $495,600 Current tax expense Income tax payable Deferred tax liability Deferred tax benefit
521,100 521,100 25,500 25,500
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PROBLEM 18-13 (CONTINUED) (d) Income Statement: Net income before income tax Less: Income tax expense Current tax expense Deferred tax (benefit) Net Income
$1,645,000 $521,100 (25,500)
Statement of Retained Earnings: Retained Earnings, January 1, 2017 As previously reported Correction of prior period error, net of income tax of $12,000 Restated balance, January 1, 2017 Add: Net Income Retained Earnings, December 31, 2017
495,600 $1,149,400
$5,678,000 28,000 5,706,000 1,149,400 $6,855,400
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PROBLEM 18-14 (a)
2017: Statement of Financial Position Account Tax Carrying Dec. 31, 2017 Base Amount Prepaid Rent -0$89,000 Rent Payable -0- (146,000) Future tax asset, December 31, 2017 Future tax asset before adjustment Incr. in future tax asset, and future tax benefit for 2017
Deductible (Taxable) Temporary Differences ($89,000) 146,000
Future Tax Tax Rate 27% 27%
Asset (Liability) ($24,030) 39,420 15,390 0 $ 15,390
(ASPE) Current or LongTerm C LT
2018: Statement of Deductible Financial Position (Taxable) Account Tax Carrying Temporary Dec. 31, 2018 Base Amount Differences Prepaid Rent -0$92,000 ($92,000) Rent Payable -0- (133,000) 133,000 Future tax asset, December 31, 2018 Future tax asset before adjustment Decr. in future tax asset, and future tax expense for 2018
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Future Tax Tax Rate 29% 29%
Asset (Liability) ($26,680) 38,570 11,890 15,390 ($ 3,500)
(ASPE) Current LongTerm C LT
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PROBLEM 18-14 (CONTINUED) (b)
2017: Accounting income Permanent differences: Golf club dues Interest incurred to earn exempt income
$884,000 $13,000 4,000
Reversing differences: Prepaid rent deductible when paid Accrued rent expense not yet deductible Taxable income Current income taxes at 28%
17,000 901,000 (89,000) 146,000 $958,000 $268,240
2018: Accounting income Permanent differences: Golf club dues Interest incurred to earn exempt income Reversing differences: Excess of rent paid over rent expense recognized ($92,000 – $89,000) Excess of rent paid over rent expense recognized ($146,000 – $133,000) Taxable income Current income taxes at 29%
$997,000 $11,000 6,000
17,000 1,014,000
(3,000)
(13,000) $998,000 $289,420
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PROBLEM 18-14 (CONTINUED) (c) 2017 Journal entries: Current Tax Expense ........................................... 268,240 Income Tax Payable ..................................... Future Tax Asset .................................................. Future Tax Benefit ........................................
15,390 15,390
2018 Journal entries: Current Tax Expense ........................................... 289,420 Income Tax Payable ..................................... Future Tax Expense ............................................. Future Tax Asset ..........................................
(d) Income before income tax Income tax expense Current Future (benefit) Net income
(e)
268,240
289,420
3,500 3,500
2018 $997,000
2017 $884,000
289,420 3,500 292,920 $704,080
268,240 (15,390) 252,850 $631,150
Refer to last two columns in tables in part (a) above. 2018
Non-current assets Future tax asset Current liabilities Future tax liability ..
2017
$38,570
$39,420
26,680
24,030
Under ASPE, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference. Solutions Manual 18-175 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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PROBLEM 18-14 (CONTINUED) (f) @ 29% Accounting income Non-deductible dues Non-deductible interest Change in tax rate ($146,000 – $89,000) × (29% – 27%)
Divided by Accounting Income
$997,000 11,000 6,000
$289,130 3,190 1,740 294,060
29.0% 0.3% 0.2% 29.5%
57,000
(1,140) $292,920
(0.1%) 29.4% 29.4%
Effective tax rate ($292,920/$997,000)
The effective tax rate differs from the statutory rate because of the effect of the permanent differences of golf club dues and interest, and because of the effect of the change in tax rate during the year on the deferred tax accounts.
(g)
The responses to (a) to (f) would not change in amount, although different terminology might be used (that is, IFRS would tend to use the terms deferred, while ASPE preparers might use the terms related to future taxes). The only calculation differences would be related to the classification of the deferred accounts on the statement of financial position. Under IFRS, these would be: 2018
Non-current assets Deferred tax asset
$11,890**
2017 $15,390*
*($39,420 – $24,030 = $15,390) **($38,570 – $26,680 = $11,890) IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position. Solutions Manual 18-176 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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PROBLEM 18-15 Prior year tax rate: $616,000 / $2,200,000 = 28% Statement of Deductible Deferred Tax Financial Position (Taxable) Account Tax Carrying Temporary Tax Asset Dec. 31, 2017 Base* Amount* Differences Rate (Liability) PP&E before change ($2,200,000) 28% ($616,000) in tax rate Increase in deferred tax liability due to change in tax rate ($2,200,000 X 2%), and deferred tax expense adjustment (44,000) Deferred tax liability (related to PP&E), Dec. 31/17 ($660,000) * not provided; no change in amount of PP&E temporary difference since Dec. 31/16 Statement of Financial Position Account
Tax
Carrying
Deductible (Taxable) Temporary
Deferred Tax Tax
Dec. 31, 2017 Base* Amount* Differences Rate PP&E ($2,200,000) 30% Pension liability (24,000) 30% Warranty liability 31,000 30% Deferred tax liability, Dec. 31/17 Deferred tax liability before adjustment Decrease (net) needed in deferred tax liability, and net deferred tax benefit * not given in the problem. Solutions Manual 18-177 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Asset (Liability) ($660,000) (7,200) 9,300 ($657,900) ( 660,000) $ $
2,100
If (ASPE) Current LongTerm LT
If (ASPE) Current LongTerm LT LT C
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PROBLEM 18-15 (CONTINUED) Calculation of loss for tax purposes and loss carryforward: Accounting loss Permanent differences: Development costs (50% X $150,000) Meals and entertainment (50% X $38,000) Reversing differences: Warranty expense Pension funding > expense Loss for income tax purposes Carryback to prior years Loss available for carryforward 50% realization probable Portion of loss to recognize as benefit Tax rate Deferred tax asset and current benefit * ($87,000 – $111,000 = –$24,000)
($494,000) 75,000 19,000 31,000 (24,000)* (393,000) 123,000 (270,000) 50% (135,000) 30% ($40,500)
2017 Income tax journal entries: Income Tax Receivable ($123,000 x 28%)……. ... 34,440 Current Tax Benefit ......................................
34,440
Deferred Tax Expense……………………………... 44,000 Deferred Tax Liability (incr. in tax rate)…. .....
44,000
Deferred Tax Liability …………………………. Deferred Tax Benefit …………………….
2,100 2,100
Deferred Tax Liability (loss carryforward) ............. 40,500 Deferred Tax Benefit (loss carryforward) ......
40,500
Instead of the three deferred tax entries above, one entry could have been made as follows: Deferred Tax Expense ………………………….. ... Deferred Tax Liability ……………………… ... ($44,000 - $2,100 - $40,500)
1,400 1,400
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PROBLEM 18-15 (CONTINUED) Income statement (partial) Loss before income tax Income tax benefit (expense) Current – loss carryback Deferred Net income (loss)
($494,000) $34,440 (1,400)*
33,040 ($460,960)
*($40,500 – $44,000 + $9,300 – $7,200 = $1,400) Note to the financial statements: The deferred tax expense increased by $44,000 due to a change in the tax rate in 2017. Reconciliation – Statutory rate to effective rate: @ 30% Loss before taxes Non-deductible: Development costs Meals/entertainment Tax rate adjustment on reversing differences ($2,200,000 x .02) ½ of loss carryforward recovery not probable Tax rate adjustment on loss carryback ($123,000 x .02)
÷ Accounting loss
$494,000
$148,200
30.00%
75,000 19,000
(22,500) (5,700) 120,000
(4.55%) (1.15%) 24.30%
2,200,000
(44,000)
(8.91%)
135,000
(40,500)
(8.20%)
123,000
(2,460) $33,040
(0.50%) 6.69%
Effective tax rate ($33,040 / $494,000 = 6.69%)
6.69%
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PROBLEM 18-15 (CONTINUED) Haley Inc.’s effective tax rate differs from the statutory rate due to permanent differences that will never be subject to tax; a change in tax rate that impacts temporary differences that are being carried forward; not recognizing the deferred tax benefit of half of the loss carryforward; and, recovery of prior year income taxes at a tax rate different than the current year rate.
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PROBLEM 18-16 (a) (1)
If Golden has taxable income in 2017 and offset it with a loss carryforward from 2016, the 31% tax rate would be used when reducing the related deferred tax asset at December 31, 2017.
(2)
If Golden reports taxable income in 2017 and ends the year with a deferred tax liability, the 30% tax rate would be used in calculating the deferred tax liability at December 31, 2017. If Golden reports a taxable loss in 2017 that is not fully absorbed through a carryback (or if the firm elects not to carry the loss back), and future taxable income is expected to be more likely than not for 2018 and future years, Golden would use the 30% tax rate for its deferred tax asset from the tax loss carryforward.
Discussion: In determining the future tax consequences of temporary differences, it is helpful to prepare a schedule that shows in which future years existing temporary differences will result in taxable or deductible amounts. The appropriate enacted tax rate is applied to these future taxable and deductible amounts. In determining the appropriate tax rate, you must make assumptions about whether the entity will report taxable income or losses in the various future years expected to be affected by the reversal of existing temporary differences. So, you calculate the taxes payable or refundable in the future due to existing temporary differences. In making these calculations, you apply the provisions of the tax laws and enacted tax rates for the relevant periods. For future taxable (deductible) amounts, if taxable income is expected in the year that a future taxable (deductible) amount is scheduled, use the enacted rate for that future year to calculate the related deferred tax liability (asset). Solutions Manual 18-181 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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PROBLEM 18-16 (CONTINUED) (b)
If the company expects to recover the value of the asset through a sale in the next year, the proceeds on this sale will attract different income tax rates. The deferred tax liability should be calculated based on the applicable tax rates to be paid. Given the above information, the deferred tax liability is calculated as follows: $1,200,000 will be recaptured and taxed at 30% = $360,000 $3,000,000 will be taxed as capital gains and attract a tax rate of 15% (as given in the question) = $450,000 Total deferred tax liability will be $810,000 ($360,000 + $450,000). Any change required to adjust the deferred tax liability will be reported in net income, as the fair value adjustment was reported in net income.
(c)
If this property was accounted for using the revaluation method, the same amounts would apply as calculated above. However, changes required to adjust the deferred tax liability account would be reflected in other comprehensive income, since the revaluation adjustment was reported via the other comprehensive income account.
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CASE Note: See the Case Primer on the Student website, as well as the Summary of the Case Primer in the front of the text. Note that the first few chapters in volume 1 lay the foundation for financial reporting decision making. CA 18-1 BAKER COMPANY LIMITED Overview - Assume that GAAP is a constraint since the financial statements are being audited. As a private company, the company could use ASPE or IFRS and therefore differences will be identified. - The role is that of company auditor and, therefore, the auditor would ensure transparency. - Management has high expectations of the company’s ability to turn around and continue to grow—and may be biased to show this. - Users include shareholders/investors who will want transparent statements. Given loss situation—they will be looking to decide whether to divest or not. Analysis and Recommendations Issue: The issue is whether the benefit from the losses should be recognized in the current financial statements. To the extent that taxes were paid in previous years, the losses would first be carried back to recover these taxes and a partial benefit could be recognized. The real issue is whether there is sufficient certainty to recognize the benefits that might be realized if the losses are carried forward. The benefits may be recognized if it is more likely than not that the benefits will be realized (under ASPE) or probable (under IFRS). This ultimately depends on the existence of sufficient taxable income in the carryforward period to be able to utilize the loss and shelter future taxable income. Note that under ASPE, the entity has a choice to use the taxes payable method or future income taxes method. Solutions Manual 18-184 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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CA 18-1 BAKER COMPANY LIMITED (CONTINUED) Recognize benefit of losses Do not - On the one hand, - Forming a conclusion that management has big plans the benefits are likely to be to expand into new realized is difficult when markets with new products. certain unfavourable Two new products are evidence exists. scheduled to be introduced - In this case, unfavourable and there are sufficient evidence would include the customers lined up to fact that there is a history purchase the products, of marginal profits only such that the company is (and, of course, the loss) predicting at least a break and the fact that this even situation using company is still in its conservative estimates. formative years. It is not - The fact that the company unusual for companies to did not suffer pre-recession sustain losses in the startlosses in its first two years up period. is a signal that they must - Furthermore, it might be be doing something right. argued that the current With respect to the state of the economy is economists, it might be unsettled. Unemployment argued that no one can is still high and consumer really predict the future. spending has still not Management has better increased significantly. The insight into its own fact that economists are company and customers predicting that it might take and, therefore, might be in two to three more years for a better position to predict consumer spending to the future. recover results in more - The fact that numerous uncertainty. competitors have gone - In addition, if using the under will hopefully open taxes payable method up new markets and help (ASPE), would only increase market share. recognize taxes - In addition, this option receivables based on would not be allowable current and/or refiled tax under the taxes payable returns. Therefore, no tax method (ASPE). assets would be recorded in advance. Solutions Manual 18-185 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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CA 18-1 BAKER COMPANY LIMITED (CONTINUED) In conclusion, although management might be able to make a strong case for profitability, it is still a projection at best and, given that the economy still appears to be slow, it might be more conservative not to recognize the benefit. This is in keeping with the role of auditor. The unrecognized benefits and expiry dates would be note disclosed.
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INTEGRATED CASE IC 18-1 CAUCHY INC. (CI) Overview - Role – controller – potential bias towards making company look better since looking for new capital and to potentially refinance loan. - Bank and potential investors are key users who will be relying on statements to make decisions – need transparency. - Public company since shares trade on TSX – IFRS is a constraint. - For investments, company must decide whether to follow IFRS 9 - (early adopt) or IAS 39. Analysis and recommendations Issue: Investment in common shares Equity method - 20% - borderline for significant influence. - Representation on Board (1/4) may allow influence. - Original intent was for strategic purposes.
At fair value with gains and losses through income or OCI - 20% inconclusive. - No longer being held for strategic purposes – i.e. intent to sell/trade is share prices rise above certain point. - If FVOCI – revalue to fair value and gains/losses to OCI (if following IFRS 9 must elect). - If FVTPL (HFT) – revalue to fair value and gains/losses to net income. - Option to treat as either (FVTPL and/or FVOCI) under IAS 39 or IFRS 9.
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IC 18-1 CI (CONTINUED) Recommendation: Could select any of the options however, given the intent to sell if the shares reach a certain price, consider measuring at fair value with gains/losses through income (easier). This option is available under IFRS 9 and IAS 39. Issue: Investment in bonds Amortized cost
Fair value (with gains/losses booked to income) - Under IAS 39 - Intent to - Under IFRS 9 – use hold to maturity expressed amortized cost only if and ability to hold given company manages cash new potential influx of cash flows on the basis of yield (raising capital). to maturity and contractual - Amortized cost – amortize cash flows include principal premium as an adjustment and interest. In this case it to interest cost. is not clear that the entire - Under IAS 39 – may have business model includes to segregate the conversion managing debt instruments option and value at fair on a yield to maturity basis value (embedded and thus this would not be derivative). NB. This is valued at amortized cost. generally beyond the scope - In addition, since these are of the text. debt instruments, the option to value at FVOCI is not available under IFRS 9. IFRS 9 only allows this option for equity instruments.
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Fair value (with gains/losses booked to income) - Under IAS 39 if classified as HTM (amortized cost) and sell prior to maturity, it may invoke tainting provisions (if significant). If this is the case, would no longer be able to value this and other debt securities at amortized costs. Therefore, do not measure at amortized cost upfront and avoid risk of tainting. - More transparent to value at FVTPL since business model seems to indicate the investments are incidental to main business.
Recommendation: To value at fair value with gains/losses through income.
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Revenue recognition – Non-refundable fees Recognize upfront fee - Multiple element arrangement? - Proprietary info considered separable unit – transferable per company and therefore must have standalone value. - Objective and reliable evidence of undelivered item since issued renewal contracts to others this year. - Persuasive evidence of contract – since deal is done and likely documented. - Measurable since no material uncertainties. - Delivery of proprietary info already occurred. - Would have to bifurcate.
Do not - Proprietary info may not be transferable separately and therefore considered an integral part of the whole transaction (has no value otherwise if not transferrable). - Recognize over time – straight line unless other pattern. - May use percentage of completion method.
Recommendation: To recognize entire contract amount over time as more reflective of the bundled nature of the transaction.
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IC 18-1 CI (CONTINUED) Issue: Hedging Hedge accounting – discussion of No hedge accounting theory as requested by client - Meant to ensure that - Optional. gains/losses from hedged - Costs and complexity are items offset gains/losses from significant. hedging items in income in - No need to use hedge same period. accounting since gains and - Must use if do not already do losses of hedged (US AR) and so. hedging items (forward - Modifies normal accounting. contract) already essentially - Must ID hedging relationship offset (forward contract between hedged and hedging recognized, valued at fair item value and gains/losses to net - Must ensure effective. income already. US AR revalued to spot rate with gains and losses to net income). - Natural hedge does not require special accounting since US AP also revalued to spot rate with gains/losses to income. Recommendation: There is no need to use hedge accounting. Risk that counterparties will fail to complete transaction – forward contract – would mean still exposed to risk. Issue: Recognize benefit of LCF Yes - Due to a one-time loss. - Otherwise expected to be profitable.
No - Not sure if company will be profitable next year.
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RESEARCH AND ANALYSIS RA 18-1 DEFERRED TAX ASSETS and IAS 12 a) According to IAS 12.24, 25 and 27 and 28, income tax benefits associated with the ability to reduce income taxes in the future can be recognized as tax assets currently only if it is probable – more likely than not – that the entity will generate taxable income in the future against which those deductible temporary differences can be applied to reduce taxable income and future taxes. That is, the benefits have to be capable of being realized. Realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on being able to earn sufficient taxable income of the appropriate character (for example, ordinary income or capital gain, and within the same taxation authority) within the carryback, or, in your case, the carryforward period available under the tax law. If this is not “probable”, then the asset and associated reduction in the accounting loss cannot be recognized. (b) IAS 12.31 indicates that an entity should consider the guidance in paragraphs 35 and 36 when it has a history of recent losses such as Davida Limited has. In such a case, in addition to having enough taxable temporary differences, there has to be some convincing evidence in order to recognize the benefits and deferred tax asset currently. IAS 12.36 indicates what criteria should be considered in making judgements about whether future taxable income will be available. These criteria are: a. Future reversals of sufficient existing taxable temporary differences that will result in increased taxable income b. Future taxable income without considering reversing temporary differences and carryforwards in the carryforward period c. Whether the past losses were a result of specific events which are unlikely to recur in the future d. Whether tax-planning strategies could be implemented.
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RA 18-1 DEFERRED TAX ASSETS and IAS 12 (CONTINUED) (c) IAS 12.30 provides examples of types of tax planning strategies that might be implemented to help ensure future taxable income will be available. These involve using tax regulations to your best advantage, particularly where an entity has choices. The examples provided can be summarized as: (1) Accelerate taxable income amounts, by deferring the tax deductibility of certain expenses or speeding up the taxability of certain income items, in order to use carryforwards before they expire (2) Sell capital assets that have appreciated in value to recover past capital cost allowance claimed that will increase future taxable income, or change the nature of taxable or deductible amounts from ordinary income or loss to capital gain or loss (3) Switch from investments that generate non-taxable income to those that generate taxable income. In Davida’s situation, some of these tax planning ideas are useful:
In the past, the company has deducted more capital cost allowance than depreciation expense in determining its taxable losses. This has resulted in the recognition of deferred tax liabilities and increased provisions for income taxes (reduced tax benefit) on your income statements. The effect has been to increase your taxable losses available for carryforward. Management could approach the tax authorities for approval to open up and adjust past tax returns to eliminate any, and perhaps all, capital cost allowance claimed in the past. This would have the effect of reducing your past taxable losses and amount of loss carryforwards, and increasing the undepreciated capital cost of your capital assets that will be available to be used in the future. At a minimum, no capital cost allowance should be taken for the current year, thus increasing the current period taxable income. Davida should also perform a review of all its revenue and expense recognition policies, particularly for tax purposes, to determine if there are any that could legitimately be changed to recognize revenue earlier and expenses later.
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RA 18-1 DEFERRED TAX ASSETS and IAS 12 (CONTINUED) (d) Whenever judgement must be exercised, such as in this situation in assessing the likelihood of generating sufficient future taxable income so that a significant income tax asset and income tax benefit can be recognized, management and the board of directors should have as their objective, the reporting of the situation closest to economic reality. That measure will be the one that is most relevant to stakeholders, to both existing and potential investors and creditors, and it will faithfully represent the company’s financial position and financial performance. Unfortunately, sometimes these decisions are made based on how management perceives the company’s resulting financial statements and its financial position and prospects will be interpreted by others. This latter approach presents difficulties for the following reasons:
It is contrary to the concepts underlying generally accepted accounting principles, the very clear intent of IAS 12, and the professional ethics of Davida’s financial management personnel and the board of directors; The interests of financial statement users conflict with each other: for example, current shareholders want the prospects to look as good as possible so they can sell their shares at a high price, while potential shareholders are interested in buying in at a reasonable price, probably on the low side; As a relatively new company, it is important that users know they can depend on the financial position and results reported. If there is any indication of overly aggressive accounting, Davida will be penalized in the future through higher costs of capital – a risk component will get built into interest rates charged by creditors and prices paid for ownership capital. For all these reasons, the ethical, professional, and sustainable decision is to measure the likely availability of future taxable income applying judgement consistent with the objective of the IAS 12 requirements. Where management might be tempted to make less-than-ideal business decisions to attract a more advantageous tax treatment, such ethical dilemmas need to be resolved in terms of what is in the best long-run interests of the shareholders. Many of the tax planning ideas reflect only choices permitted under the tax legislation, and have no effect on company operations. There are no ethical implications related to making these choices.
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RA 18-2 MAPLE LEAF FOODS INC. Note: all amounts are in thousands of Canadian dollars. (a) The amount of the income tax expense (benefit) related to the loss from operations before discontinued operations on the company’s Statement of Net Earnings for 2014 was a benefit of $74,556 and for 2013, a benefit of $51,500. (Because of losses incurred in operations that are continuing, and the fact that these losses can be deducted from taxable incomes going back to recover past taxes and/or carried forward to reduce future taxable incomes, the benefits associated with some of the losses can qualify as a tax asset and tax benefit in the year of the loss.) The company uses intraperiod tax allocation relating to its discontinued operations in both years, as well as for its other comprehensive income (OCI) items. Note 25 indicates that discontinued operations attracted income tax expense of $107,123 in 2014 and $127,790 in 2013. The company had positive earnings and gains on the disposal of the operations they discontinued in each year, and the related tax effect needs to be associated with the underlying transactions that attract the tax. Items in OCI tend to be the result of unrealized gains and losses that will eventually attract income tax when realized. The tax expense/benefit, however, is associated with the events when recognized for accounting purposes. In 2014, three such specific items were recognized, resulting in recognizing a net $16,800 related tax benefit in OCI; and in 2013, three items were recognized which attracted a net income tax expense of $70,600. In each of the three cases in the two years, the tax is reported along with the type of gain or loss reported. There are income taxes payable of $26,614 on the most recent SFP, and $0 for the comparative date the previous year. However, there was $43,300 of income and other taxes receivable at December 31, 2013, but no amount for this account at December 31, 2014. This is in comparison with amounts reported on the statement of cash flows of net income taxes received of $1,442 and $28,537 in 2014 and 2013, respectively. It should be noted that the references to income tax adjustments to net earnings in the top portion of the operating cash flows section of the cash flow statement, both current and deferred, were merely to add back/deduct the amounts reported on the statements of net earnings so that the company could report the actual amount of net income taxes paid/received as a separate line item below. Reporting the income taxes paid or received in a year is a required disclosure. (b) The income tax benefits reported using the statutory tax rates and effective tax rates for 2014 and 2013 are presented below. There are minor differences between these two rates and the resulting benefits in each year because of offsetting amounts. Solutions Manual 18-195 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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RA 18-2 MAPLE LEAF FOODS INC. (CONTINUED) (b) (continued) 2014
2013
($76,418)
($51,125)
(1,965) (1,394)
$(5,911) (1,888)
2,050 1,212
1,376 3,698
1,140
1,905
408
407
411
-0-
-0($74,556)
38 ($51,500)
($ in thousands) Income tax(benefit) at applicable statutory rate Increase in benefit and rate due to non-taxable capital gains Increase in benefit due to “other” reasons Reduction in benefit and rate due to manufacturing and processing credit Reduction due to share based compensation Reduction in benefit due to non-deductible expenses Reduction due to tax rate differences in other countries Reduction due to non-recognition of tax loss benefits Reduction in benefit due to change in deferred balances re tax rate changes Total income tax benefit at effective rates
Canadian Statutory rate Effective Tax Rate: ($74,556/$288,369) ($51,500/$192,925)
26.5%
26.5%
25.9% 26.7%
The Company’s applicable statutory rate is the Canadian combined rate applicable in jurisdictions in which the Company operates. The causes of the increases and decreases in this tax rate and the resulting tax benefit are explained in the table above. As is indicated, the effective rates did not deviate too far from the statutory rates when all causes of various effects are considered. (c) A schedule of the deferred tax balances reported on the 2014 SFP, along with their causes and the related asset or liability with different tax and book values is reported below. Under IFRS, all deferred tax balances on the SFP are considered non-current. (Under ASPE, it would be based on the classification of the related asset or liability. Where there is no related asset or liability, the classification of the tax balance would be based on when the related temporary difference was expected to reverse.)
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RA 18-2 MAPLE LEAF FOODS INC. (CONTINUED) (c) (continued) Amounts in $000 Amount
SFP item
Deferred Tax Assets Tax loss carryforwards Accrued liabilities Employee benefits Other
$47,411 No SFP account 39,376
Accounts payable and accruals, & provisions
9,565 Employee benefits (a liability) 734 Not identified $97,086
Deferred Tax Liabilities Property and equipment Cash basis farming Goodwill and intangibles Total
$7,673 Property & equipment 8,822 Accounts receivable 5,605 Goodwill & intangible assets $22,100
Reported on the SFP as a deferred tax asset
$74,986 As a non-current asset
(d) Maple Leaf Foods, in Note 24, indicates that it has no unrecognized deferred tax assets at December 31, 2014 (although it did have approximately $39,000 of such assets at December 31, 2013 representing mainly Canadian and U.S. tax losses available to carry forward). The company explains that tax benefits associated with all of its tax losses at December 31, 2014 are expected to be realized in the future through earning sufficient taxable profits. The company indicates that it has unrecognized deferred tax liabilities related to the undistributed earnings of subsidiaries and other investments. The reason provided for the non-recognition is that Maple Leaf Foods is able to control the distribution of any such amounts in the future and it is not probable that such amounts will be distributed in the foreseeable future. Therefore, since there will be no future reversal of the temporary differences, no deferral has been recognized. Solutions Manual 18-197 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
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RA 18-3 COMPARATIVE ANALYSIS (a) All three companies operate in the retail food industry. Loblaw and Empire operate grocery stores, drug stores and real estate interests (Loblaw also has a financial services segment) in Canada, and Alimentation Couche-Tard (Couche-Tard) operates convenience stores in North America, Scandinavia, Poland, the Baltics and Russia. (b) A schedule of the total income tax provision for each company is presented below. All three companies included income tax provisions in current net earnings and other comprehensive income items.
(in millions of $) Year ended Total tax provision shown in statement of earnings Tax provision in other comprehensive income (i) Total income tax provision
Couche-Tard US$ April 26, 2015
Loblaw CAD$ January 3, 2015
Empire CAD$ May 2, 2015
306.2
25.0
150.4
-11.5 _____ 294.7
-16.0 ____ 9.0
-10.1 _____ 140.3
(i) Note – this was determined from each of the OCI items found either in the notes or on the statement of comprehensive income. No provisions were found in the retained earnings of any of the companies. (c) A schedule of the companies’ deferred income tax assets and liabilities as at their most recent balance sheet dates, along with the source of the underlying temporary differences, is presented below. One would expect companies in the same industry to have similar temporary differences and these three companies do have some major temporary differences in common. Although the companies use different wording to describe the underlying temporary differences and report in varying degrees of detail, there are major similarities for property and equipment, goodwill and intangibles, loss carryforwards, and for other liabilities (the expectation is that Couche-Tard’s “expenses deductible in future” are similar).
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RA 18-3 COMPARATIVE ANALYSIS (CONTINUED) (c) (continued) CoucheTard US$
Loblaw CAD$
Empire CAD$
Property and equipment Investments
(524.8)
(517)
(93.6) (19.8)
Deferred (charges) credits (net) Goodwill and intangibles
30.2 (205.9)
(1,816)
(166.1)
52 56 347 10 181
5.2 2.5 3.8 113.7 (0.5) 52.3
(in millions of $)
Asset retirement obligation
70.3
Inventories Other Trade and other payables Other liabilities Other assets Loss carry forwards Revenues taxable in future
(61.7)
Expenses deductible in future
118.2
Unrealized exchange gain (loss) Equity Tax attributes Provisions Long-term debt/liabilities Net deferred tax assets (liabilities)
20.8
(6.2) 11.3 80.5 75.6 15.6
(478.6)
(1,687)
-0-
(d) Yes, in many respects, one would expect the three companies to be subject to similar income tax legislation and tax rates, in that all three are Canadian based companies. However, Loblaw and Empire operate in most provinces, while Couche-Tard operates mainly in Quebec and Ontario in Canada, as well as in many countries around the world. Therefore, Couche-Tard’s tax rates may be somewhat different. The three companies’ statutory rates and their effective tax rates are indicated below.
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RA 18-3 COMPARATIVE ANALYSIS (CONTINUED) (d) (continued) Couche-Tard Statutory rate in Canada Difference due to different rates in other countries Effect of tax rate changes Permanent differences FV adjustment to Trust Unit Liability Adjustment re prior periods Capital items Other Effective rate reported
Loblaw
26.9%
26.1%
(2.96%)
(3.2%)
(0.02%) 0.78%
2.2%
Empire* 26.4%
0.2%
5.8% 1.2% (0.8%) (0.2%) 24.7%
32.1%
25.6%
*Calculated % changes from dollar information g
Both Couche-Tard and Loblaw benefitted from lower tax rates in other jurisdictions, although Loblaw indicates in Note 35 that all material operations are carried out in Canada. Most of the differences between the statutory rates and effective rates are due to the types of non-operating transactions that the companies engaged in during the year. For example, Loblaw made a fair value (loss) adjustment on a Trust Unit Liability which was likely not a tax-deductible item, thereby increasing the company’s effective rate. Empire, on the other hand, appears to have had capital gains in its income which attract a lower rate of tax. (e) Loblaw discloses the fact that it has unrecognized deferred tax assets of $76 million relating to deductible temporary differences ($19) and income tax losses ($57). While the tax losses expire in years ranging from 2027 to 2034, the deductible temporary differences do not expire. The reason provided for the non-recognition of the associated tax benefits as deferred tax assets is that it is considered not probable that future taxable income will be available to enable the company to use the temporary differences to reduce future income taxes payable. Empire indicates that all deferred tax assets have been recognized in the accounts, while Couche-Tard makes no mention of any unrecognized amounts.
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RA 18-4 INTERNATIONAL COMPARISON (a) Below, is the schedule of information on statutory and effective income tax rates for five companies operating in the railroad industry, but in different countries. Country
Year end
1. Deutsche Bahn
Germany
Dec. 2014
31,
30.5%
Effective income tax rate 5.4%
2. East Japan Railway Company
Japan
Mar. 2013a
31,
37.8%
42.0%
3.NSB Group
Norway
31,
27.0%
6.0%
4. Canadian National Railway
Canada
Dec. 2014 Dec. 2014
5. Union Pacific Railroad Corp.
United States
Dec. 2014
Statutory income tax rate
31, 15.0% federal + 12.2% provincial and other = 27.2% statutory rate 31, 35.0% federal + 3.1% state = 38.1% statutory rate
27.4%
37.9%
a
Tax rates were not reported for its year ended March 31, 2014 because the variance between the statutory and effective rates was less than 5% and therefore, immaterial. (b) Notes explaining difference between statutory and effective rates: 1. Deutsche Bahn: recognition of temporary differences and losses carryforward, non-taxable government grants received for purchase of capital assets, lower foreign taxes, non-taxable income received 2. East Japan: increase made in valuation allowance 3. NSB Group: ¾ of the reduction due to permanent differences related to investments, most of remainder due to recognition of benefit of tax loss not previously recognized 4. CNR: minor difference due to minor offsetting tax reduction due to lower rates for capital gains and increase due to a prior year’s income taxes 5. Union Pacific: two very minor offsetting differences
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RA 18-4 INTERNATIONAL COMPARISON (CONTINUED) (b) (continued) The table above indicates that most countries in the list have a similar statutory rate of 30% – 38%, with Canada and Norway a little lower at 27%. It is interesting to note the difference between the federal and provincial/state rates of the U.S. and Canadian railways, most likely reflecting a difference in the areas that each level of government has responsibility for. All countries appear to be applying the same method of accounting for income taxes for financial reporting purposes.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-5 IFRS and ASPE (a) (1) ASPE: Under ASPE, an adjustment must be made to the deferred tax liability account so that it is measured and reported at the amount at which the liability is expected to be settled, normally using those rates enacted at the reporting date. [Section 3465.51] Therefore, an adjustment of $30,000 ($1 million X the 3% increase in rates) is required to increase the deferred tax liability to the correct balance. The associated $30,000 adjustment to income tax expense is required to be reported in with the current year’s deferred income tax expense in income before discontinued operations. [Section 3465.59 and .60] IFRS: Under IFRS, the increase in the deferred tax liability of $30,000 is identical because IFRS requires the deferred liability to be measured at the amount expected to be needed to settle the obligation to the tax authorities, using the tax rates that have been enacted or substantially enacted at the reporting date. [IAS12.47]. The treatment required for the corresponding increase in tax expense under IFRS is different than that indicated for ASPE. IAS 12.58(a) and .61A require backward tracing; that is, for the deferred tax adjustment to be recognized directly in equity (in this case, retained earnings) if the original deferral was recognized in equity. (2) ASPE: Under ASPE, the building is required to be carried at amortized cost and will not be revalued to fair value. Such assets are not revalued, (except one time on transition to IFRS which is being ignored as part of this question). Therefore, the existing temporary difference of $6.5 million – ($8.0 million - $2.3 million) or $0.8 million remains, but the deferred tax liability related to this temporary difference must be adjusted for the same reasons as in part (1). The adjustment required, then, is an increase in the deferred tax liability of $24,000 or ($800,000 X 3%) [see Section 3465.51]. The associated increase in the deferred tax expense is reported in the current year’s deferred tax expense and in income before discontinued operations [see 3465.59 and .60]. IFRS: Under IFRS, the company has the option of accounting for the building at amortized cost, and the required adjustment in this case would be the same as indicated under ASPE. However, under IFRS, the company also has an option to account for the building using the revaluation method. Using this method, the increase in the fair value of $3.5 million ($10.0 million less $6.5 million) results in a “gain” that is reported in revaluation surplus, a component of OCI. There is now a total temporary difference of $4.3 million between the accounting value of the asset of $10.0 million and its tax base of $5.7 million ($8 million – $2.3 million).
Solutions Manual 18-203 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-5 IFRS and ASPE (CONTINUED) (a) (continued) (2) (continued) The related deferred tax liability on the reporting date would be: Balance before adjustment: 25% X ($6.5 million - $5.7 million) = $200,000 cr Increase due to 3% tax increase: 3% ($6.5 million - $5.7 million) = 24,000 cr Deferred tax on revaluation gain in OCI: 28% X ($10 million - $6.5 million) = 980,000 cr Total = $1,204,000 cr Under this option, in addition to the $24,000 increase in the deferred tax liability account on the balance sheet and the deferred income tax expense on the income statement due to the 3% increase in the tax rate [see IAS 12.58], a revaluation gain of $3.5 million would be reported in OCI (revaluation surplus), net of a deferred income tax expense of $980,000 [see IAS 12.61]. The deferred tax liability account increases by a total of $24,000 + $980,000 = $1,004,000. Tax expense components relating to the change in tax rates would be separately disclosed [see IAS 12.80(d)]. The deferred tax liability is reported on the statement of financial position as a non-current liability [see IAS 1.69]. (3) ASPE: While ASPE permits use of the taxes payable method or the temporary difference approach for reporting income taxes, LGS appears to have adopted the temporary difference (future income taxes) approach for its prior period adjustments and capital assets, and the same approach is assumed throughout these situations [see Section 3465.03]. However, the company has the option of reporting this investment at fair value through net income (FV-NI) or at cost. If the equity investment is accounted for at cost, the investment’s carrying amount remains at $340,000, and no increase in value is reported in net income. Also, since the gain is only reported for tax purposes when realized, there is no effect on taxes payable in 2017. In addition, because the tax base and accounting value of the asset are the same at $340,000, there is no temporary difference and therefore no deferred tax liability.
Solutions Manual 18-204 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-5 IFRS and ASPE (CONTINUED) (a) (continued) (3) (continued) If the investment is adjusted to its fair value of $510,000, the resulting unrealized gain of $170,000 ($510,000 – $340,000) is reported in net income. The tax base of the investment is $340,000, the accounting value is $510,000, and therefore there is a temporary difference of $170,000. At a tax rate of 28%, the deferred tax liability account needs to be increased by $47,600 ($170,000 X 28%). This tax effect is reported as the deferred tax expense component of income tax expense on the 2017 income statement in income before discontinued operations [Section 3465.20, .51 and .59]. IFRS: Under IFRS, LGS must account for the investment at fair value through net income (FV-NI), since the investment was not acquired for contractual cash flows and it appears the shares were acquired for trading purposes. In this situation, the accounting is exactly the same as for ASPE above when carried at FV-NI [IAS 12.15, 46 and .47, 58, .77]. NOTE: Under ASPE, LGS is permitted to switch to the taxes payable method without the usual stipulations required for a change in accounting policy required under Section 1506.06(b) [Section 3465.03]. If the company did change to the taxes payable method, the effects of using the temporary difference/future income taxes method would be accounted for retroactively. The effect would be the elimination the existing deferred tax liability account and a reduction in income tax expense in each of the specific years the deferrals had been increased, adjusted through 2017’s opening retained earnings. For situations (1) to (3), none of the effects in the ASPE columns in the table below would be applicable.
Solutions Manual 18-205 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-5 IFRS and ASPE (CONTINUED) (b)
Situation 1.3% tax increase 2.Cost method
ASPE Effect on Effect on deferred tax 2017 tax liabilities expense*
Effect on deferred tax liabilities
Effect on 2017 tax expense*
+$30,000 +$24,000
+$30,000 +$24,000
$-0+$24,000
N/A
N/A
+$1.004 million
+$24,000
N/A
N/A
N/A
N/A
At FV +$47,000 +$47,000 +$47,000 *related to income before discontinued operations
+$47,000
Revaluation method 3.Shares At cost
+$30,000 +$24,000
IFRS
It appears the effects are relatively similar. The areas of difference relate to the fact that under ASPE, more adjustments are recognized in net income – in part (1) because of no backward tracing of changes in tax rates, and in part (2) because ASPE does not allow fair value changes to be recognized anywhere other than net income (does not allow the revaluation method or the FV-OCI method for investments, and does not recognize OCI). A real difference would be felt if LGS chose to use the taxes payable method instead, as there would be no adjustments on an ongoing basis under ASPE in the table above.
Solutions Manual 18-206 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-6 BASIC CONCEPTS and PRINCIPLES (a) The following objectives of accounting for income taxes are identified in the introduction to IAS 12 Income Taxes: 1. To recognize the current and future tax consequences related to a. The carrying amounts of assets and liabilities recognized in the statement of financial position as those assets are realized and obligations are met, and b. The current accounting period transactions and events that have been recognized. 2. To report the current and future tax consequences of current period transactions, activities and events together with the type of transaction or event that gave rise to the tax effect. 3. To properly recognize and report information about the tax consequences related to unused tax losses and unused tax credits. 4. To appropriately present and disclose information related to income taxes in the financial statements.
(b) The following basic principles are applied in accounting for income taxes at the date of the financial statements: 1. A current income tax liability or asset is recognized for the estimated taxes payable or refundable based on the tax return for the current year. 2. A deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carry-forwards using the enacted (or substantially enacted) tax rates expected to apply when the temporary differences reverse. 3. Current income tax expense, for the most part, is related to the recognition of revenues and expenses under GAAP. 4. Future tax expense is based on the changes required in the carrying amounts of the deferred tax assets and liabilities in the statement of financial position. 5. If necessary, and based on available evidence, deferred tax assets are adjusted to remove the potential tax benefits where it is not probable that they will be realized. 6. Income tax expense is “matched” with the related type of transaction that gave rise to the tax, such as with income before discontinued operations, discontinued operations, items of OCI, events recognized in retained earnings, and with types of capital transactions.
Solutions Manual 18-207 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-6 BASIC CONCEPTS and PRINCIPLES (CONTINUED) (c) Under the future income taxes method (ASPE) or the temporary difference approach (IFRS) of accounting for income taxes, the deferred (or future) income tax outflows and inflows related to the realization of assets and the settlement of liabilities for their carrying amounts are recognized as deferred tax liabilities and deferred tax assets. (Note: we use the term deferred here and below for both IFRS and ASPE to simplify the discussion.) These deferred tax liabilities and deferred tax assets meet the definitions of liabilities and assets in the conceptual framework. Temporary differences between an asset’s or liability's carrying amount and its tax base or unused tax losses, may generate benefits in the future in the form of reduced tax payments or a recovery of taxes paid in the past. Temporary differences between an asset’s or liability's carrying amount and its tax base may require additional tax payments in the future as the asset is realized or liability is settled. This method is considered to be more effective in achieving the objective of financial reporting— communicating information that is useful to users—as the method provides users with better measures of a company’s economic resources and obligations where there are income tax consequences associated with asset and liability recovery or settlement. In reporting deferred tax assets and liabilities, there is one difference between ASPE and IFRS. ASPE (under this alternative) will report future tax assets or future tax liabilities as either current or non-current. This classification will depend on when the future tax amount is expected to reverse. Under IFRS, all deferred tax assets and liabilities are classified as non-current.
Solutions Manual 18-208 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-6 BASIC CONCEPTS and PRINCIPLES (CONTINUED) (d) An asset provides an economic benefit to the entity, the entity controls access to the benefit and it results from past transactions or events. Currently, there are two issues relating to the measurement and reporting of deferred tax assets:
The cash effects related to the benefits of this asset will be received sometime in the future. As such, it should be discounted to approximate the present value of the benefit to be received. Also, the amounts of the future benefits are not assured, they are merely “probable,” and they are not single point estimates. Therefore, preferred measurements would use probabilities of likely outcomes to determine the best estimate of the economic resource. Also, to what extent does the entity control the asset? In the case of loss carryforward benefits where the company has not been profitable, the government does not owe the company this amount, and the realization of this deferred tax asset is highly dependent on a future event that may or may not happen. Consequently, the right is not “controllable”. Perhaps it would be better thought of as merely a “conditional right to receive the benefits”. Using this strict definition, perhaps the deferred tax asset arising from the use of loss carryforwards should not be recorded.
A liability represents a present duty or responsibility that obligates the company, giving it little discretion to avoid the obligation that results from a past transaction. Similar issues arise in looking at deferred tax liabilities within this definition:
The amount of this liability may be paid sometime in the future. As such, it should be discounted to approximate the present value of the obligation that will be met in the future. In addition, there are a variety of different outcomes. As a result, it could be argued that the entity should estimate the amount and timing of the obligation under each of these different outcomes, determine the present values of each of these outcomes, and then estimate the probability of each outcome. Does this represent a represent an enforceable obligation? The company does not yet owe these taxes. The amount of the deferred tax liability will depend on future taxable profits, and when these temporary differences will reverse. For example, if a company continues to invest in property, plant and equipment and the capital cost allowance claim is always greater than the depreciation for tax purposes, then it may be a long time (if ever) that any requirement for payment will arise Consequently, the obligation is not presently enforceable. This liability represents a “conditional obligation to pay” given certain future events occur, and this is not a liability.
Solutions Manual 18-209 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-7 OPERATING and ACCOUNTING POLICIES (a) Accelerated depreciation, such as the double-declining balance method used for income tax purposes, allows a company to deduct substantial capital cost allowance early in an asset’s life. Yearly CCA declines to a point where the accelerated CCA amount is lower than the depreciation expense computed under the straight-line method. The reversing point occurs when the accelerated CCA matches the straight-line rate. Some companies are motivated to sell assets prior to this point to maximize the CCA benefit provided in terms of income taxes. As long as the company is growing, the company may receive a prolonged deferral of income taxes. This is possible because, while the proceeds received on sale of the old asset reduce the balance in the CCA Class involved, it is replenished with the higher cost of the replacement asset which can then start to be tax depreciated at a substantial amount. (b) The types of ethical implications related to the company’s aggressive deferral of income tax include those related to applying the tax legislation, Henrietta’s professional considerations as an accountant, and the general business ethics of the company. These need to be assessed by Henrietta because of the non-payment of current income taxes by the company. This is possible due to the tax deferral permitted by temporary differences caused by the difference in financial accounting principles and tax laws. The practice of selling-off assets before the differences reverse and replacing them with new assets means that the company has transferred the obligation to pay taxes several years into the future. (c) Shareholders would be harmed by Mesa’s income tax practice. In order to maintain this policy, and using the mechanism described in (a) above, the company has to systematically acquire new assets at a cost higher than the previously disposed assets. To repurchase assets at a lower cost could also trigger recaptured CCA in some cases. This means that management is probably embarking on a short-term policy of improving its financial picture at the cost of a damaging cash management policy, or it is indebting itself and increasing the company’s solvency risk. One would also have to question whether there is a legitimate need for these new assets. This would be demonstrated by a decrease in the effectiveness of their use of assets in declining return-on-assets and asset turnover ratios. Preconceived accounting outcomes should not drive corporate policies. In summary, Henrietta has to determine whether the business decisions are being made within a narrow objective of reducing income tax cash flows, and whether this is detrimental to the company as a whole. Does this policy result in the company having a higher than necessary cost of capital, for example?
Solutions Manual 18-210 Chapter 18 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
RA 18-7 OPERATING & ACCOUNTING POLICIES (CONTINUED) (d) As an ethical accountant, Henrietta is obligated to uphold objectivity and integrity in the practice of financial reporting. As an ethical professional accountant, she has a duty to communicate her concerns about whether such a practice is in the best long-run interests of the company and its shareholders, as indicated above. If she thinks that this practice is unethical, then she needs to communicate her concerns to the highest levels of management within Mesa, including members of the Board and/or the Audit Committee. It would appear here that Mesa Inc. is simply trying to minimize its cash income tax payments, which probably would not be considered illegal or unethical. Current tax legislation permits taxpayers to arrange their affairs in order to pay the minimum amount of tax—when it is done within tax rules. Henrietta should ensure that what the company is doing is not only within the letter of the law, but also within the spirit of the legislation, if specified, and is, in fact, in the best interests of the company. Does the legislation indicate an overall objective related to the capital cost allowance system that might have precedence over the specific regulations? She should ensure that these transactions and policies would be considered acceptable by CRA, and that they would not be considered having a sole purpose of avoiding paying income taxes. Such activities that are structured to be within the rules but have no bona fide business purpose can be caught under GAAR (General anti-avoidance rules). These transactions, if considered unacceptable, could be re-assessed by the Canada Revenue Agency.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Eleventh Canadian Edition
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MMXVII II F3
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