Chapter 15

Solutions

Exercise 15.1

Item Taxable Temporary Difference
Deductible Temporary Different
Permanent Difference
A property owner collects rent in advance. The amounts are taxed when they are received. X
Depreciation claimed for tax purposes exceeds depreciation charged for accounting purposes. X
Dividends received from an investment in another company are reported as income, but are not taxable. X
A provision for future warranty costs is recorded but is not deductible for tax purposes until the expenditure is actually incurred. X
Membership dues at a golf club are reported as a promotion expense but are not deductible for tax purposes. X
Construction revenue is reported using the percentage of completion method but is not taxed until the project is finished. X
The present value of the costs for the future site remediation of an oil-drilling property has been capitalized as part of the asset’s carrying value. This will increase the amount of depreciation claimed over the life of the asset. These costs are not deductible for tax purposes until they are actually incurred. X
A revaluation surplus (accumulated other comprehensive income) is reported for assets accounted for under the revaluation model. The gains will not be taxed until the respective assets are sold. X
Included in current assets is a prepaid expense that is fully deductible for tax purposes when paid. X
A penalty is paid for the late filing of the company’s income tax return. This penalty is not deductible for tax purposes. X

Exercise 15.2

Amount
Accounting profit $350,000
Permanent difference:

Life insurance not taxable

(100,000)
Temporary difference:

Depreciation not deductible

20,000
Taxable profit 270,000
Tax rate 20%
Current tax payable $54,000
Tax expense comprised of:

Current tax expense

$54,000

Deferred tax income (20,000\;\times\;20\%)

(4,000)

Total tax expense

$50,000

Exercise 15.3

  1. Current Tax:
    Amount
    Accounting profit $3,500,000
    Permanent differences:

    None

    Temporary differences:

    Construction not yet taxable

    (900,000)

    Capital allowance > depreciation

    (1,100,000)
    Taxable profit 1,500,000
    Tax rate 30%
    Current tax payable $450,000

    Temporary difference re: depreciation calculated as follows:

    Cost of asset $6,800,000
    Accumulated depreciation 1,200,000
    Carrying value 5,600,000
    Less tax base 4,500,000
    Excess capital allowance $1,100,000

    Deferred Tax Liability:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Construction revenue 900,000 0 (900,000) 30% (270,000)
    PPE 5,600,000 4,500,000 (1,100,000) 30% (330,000)
    Total (600,000)
  2. General journal example.
  3. Profit before tax $3,500,000
    Income taxes

    Current expense

    (450,000)

    Deferred expense

    (600,000)
    (1,050,000)
    Net profit for the year $2,450,000

Exercise 15.4

  1. Current Tax:
    Amount
    Accounting profit $3,700,000
    Permanent differences:

    None

    Temporary differences:

    Construction now taxable

    900,000

    Capital allowance < depreciation

    400,000
    Taxable profit 5,000,000
    Tax rate 30%
    Current tax payable $1,500,000

    Temporary difference re: depreciation calculated as follows:

    Cost of asset $6,800,000
    Accumulated depreciation 2,600,000
    Carrying value 4,200,000
    Less tax base 3,500,000
    Excess capital allowance $700,000

    Since last year’s excess was $1,100,000, $400,000 of the temporary difference reversed during the year.

    Deferred Tax Liability:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Const. rev. 0 0 0 30% 0
    PPE 4,200,000 3,500,000 (700,000) 30% (210,000)
    Total (210,000)
    Opening bal. (600,000)
    Adjustment 390,000
  2. General Journal example
  3. Profit before tax $3,700,000
    Income taxes

    Current expense

    (1,500,000)

    Deferred income

    390,000
    (1,110,000)
    Net profit for the year $2,590,000

Exercise 15.5

  1. Opening deferred tax liability balance of $17,500 implies an opening temporary difference of (17,500 ÷ 25%) = $70,000. If the carrying amount at 31 December 2021 was $320,000, then the tax base must have been (320,000 – 70,000) = $250,000. At 31 December 2022, the carrying amount will be (320,000 – 50,000) = $270,000. At 31 December 2022, the tax base will be (250,000 – 58,000) = $192,000Current Tax:
    Amount
    Accounting profit $416,000
    Permanent differences:

    Non-deductible entertainment

    21,000
    Temporary differences:

    Warranty not deductible in 2022

    56,000

    Capital allowance > depreciation

    (8,000)
    Taxable profit 485,000
    Tax rate 25%
    Current tax payable $121,250

    Deferred Tax Liability:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Warranty (56,000) 0 56,000 25% 14,000
    PPE 270,000 192,000 (78,000) 25% (19,500)
    Total (5,500)
    Opening bal. (17,500)
    Adjustment 12,000
  2. General journal example
  3. Profit before tax $416,000
    Income taxes

    Current expense

    (121,250)

    Deferred income

    12,000
    (109,250)
    Net profit for the year $306,750
  4. Current Liabilities

    Income taxes payable

    $121,250
    Non-Current Liabilities

    Deferred income taxes

    5,500

Exercise 15.6

  1. Current Tax:
    2021 2022 2023
    Accounting profit 110,000 242,000 261,000
    Permanent differences:

    Dividend

    (10,000) (10,000) (10,000)
    Temporary differences:

    (plug to balance)

    (15,000) (36,000) 34,000
    Taxable profit 85,000 196,000 285,000
    Tax rate 20% 23% 23%
    Current tax payable/exp. 17,000 45,080 65,550

    Deferred Tax Liability – 2021:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 15,000 0 (15,000) 20% (3,000)
    Opening bal. 0
    Adjustment (3,000)

    Deferred Tax Liability – 2022:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 51,000 0 (51,000) 23% (11,730)
    Opening bal. (3,000)
    Adjustment (8,730)

    Deferred Tax Liability – 2023:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 17,000 0 (17,000) 23% (3,910)
    Opening bal. (11,730)
    Adjustment (7,820)
  2. Summary:
    Income Statement

    2021 2022 2023
    Current tax expense 17,000 45,080 65,550
    Deferred tax expense (income) 3,000 8,730 (7,820)

    Balance Sheet

    2021 2022 2023
    Deferred tax liability 3,000 11,730 3,910
  3. Profit before tax $242,000
    Income taxes

    Current

    45,080

    Deferred resulting from temporary differences

    8,280

    Deferred resulting from tax rate change

    450
    53,810
    Net profit for the year $188,190

    Note: The deferred tax resulting from the rate change is calculated as the opening temporary difference from 2021 multiplied by the rate differential: $15,000 × (23% – 20%) = $450. The deferred tax resulting from temporary differences is calculated as the current year temporary differences multiplied by the current rate: $36,000 × 23% = $8,280. Deferred tax adjustments resulting from rate changes must be disclosed separately from deferred tax adjustments resulting from changes in temporary differences.


Exercise 15.7

  1. Current Tax:
    2021 2022 2023
    Accounting profit 110,000 242,000 261,000
    Permanent differences:

    Dividend

    (10,000) (10,000) (10,000)
    Temporary differences:

    (plug to balance)

    (15,000) (36,000) 34,000
    Taxable profit 85,000 196,000 285,000
    Tax rate 20% 23% 23%
    Current tax payable/exp. 17,000 45,080 65,550

    Deferred Tax Liability – 2021:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 15,000 0 (15,000) 23% (3,450)
    Opening bal. 0
    Adjustment (3,450)

    NOTE: Deferred tax is recorded at the rate expected to be in effect. This is substantively enacted rate at the end of 2021.

    Deferred Tax Liability – 2022:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 51,000 0 (51,000) 23% (11,730)
    Opening bal. (3,450)
    Adjustment (8,280)

    Deferred Tax Liability – 2023:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 17,000 0 (17,000) 23% (3,910)
    Opening bal. (11,730)
    Adjustment 7,820
  2. Summary:
    2021 2022 2023
    Current tax expense 17,000 45,080 65,550
    Deferred tax expense (income) 3,450 8,280 (7,820)
    Deferred tax liability 3,450 11,730 3,910
  3. Profit before tax $242,000
    Income taxes

    Current

    45,080

    Deferred

    8,280
    53,360
    Net profit for the year $188,640

    Note: The deferred tax resulting from the rate change does not need to be reported as it was already accounted for in 2021.


Exercise 15.8

  1. General journal example.
    (47,000 – 21,000) = 26,000 ending balance of carry forward after applying loss to reduce current taxable income to 0
    Ending deferred tax = 26,000 × 18% = 4,680
    Adjustment to deferred tax asset = 9,400 – 4,680 = 4,720. There is no adjustment for current taxes in 2024 because taxable income has been reduced to 0 by the carryforward.
  2. General journal example.
    No j/e in 2023 for the benefit of the loss carry forward, as the asset is not recognized. However, disclosure will be made of the unrecorded carry forward amount (47,000). No j/e in 2024, as current tax will be 0 and no deferred tax asset will be established. However, disclosure is required of the current tax expense components:

    Current tax expense 21,000\;\times\;18\% $3,780
    Less benefit of loss carried forward (3,780)
    Current tax expense $0

    As well, disclosure of the remaining, unrecorded loss carried forward (26,000) would continue.


Exercise 15.9

  1. Current Tax:
    Amount
    Accounting profit $750,000
    Permanent differences:

    Non-deductible fines

    12,000

    Non-taxable dividends

    (7,500)
    Temporary differences:

    Previously taxed revenue now earned

    (95,000)

    New subscriptions taxed but not earned

    68,000

    Capital allowance < depreciation

    13,000
    Taxable profit 740,500
    Tax rate 30%
    Current tax payable $222,150

    Deferred Tax:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Unearned revenue (220,000) 0 220,000 30% 66,000
    PPE 298,000 192,000 (106,000) 30% (31,800)
    Total 34,200
    Opening bal. 38,400
    Adjustment (4,200)

    Unearned revenue = 247,000\;-\;95,000\;+\;68,000\;=\;220,000
    Carrying amount PPE = 357,000\;-\;59,000\;=\;298,000
    Tax base PPE = 238,000\;-\;46,000\;=\;192,000

  2. General journal example.
  3. Profit before tax $750,000
    Income taxes

    Current expense

    (222,150)

    Deferred expense

    (4,200)
    (226,350)
    Net profit for the year $523,650
  4. 2022 2021
    Current assets

    Income taxes receivable

    16,250
    Non-current assets

    Deferred income taxes

    34,200 38,400
    Current liabilities

    Income taxes payable

    222,150

Exercise 15.10

  1. Deferred Tax Liability – 2021:
    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 180,000 165,000 (15,000) 25% (3,750)
    Opening bal. 0
    Adjustment (3,750)

    Deferred Tax Liability – 2022:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 160,000 135,000 (25,000) 30% (7,500)
    Opening bal. (3,750)
    Adjustment (3,750)

    Deferred Tax Liability – 2023:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 140,000 135,000 (5,000) 35% (1,750)
    Opening bal. (7,500)
    Adjustment 5,750

    Deferred Tax Liability/Asset – 2024:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 120,000 135,000 15,000 35% 5,250
    Opening bal. (1,750)
    Adjustment 7,000

    Deferred Tax Asset – 2025:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Temp Diff 100,000 110,000 10,000 30% 3,000
    Opening bal. 5,250
    Adjustment (2,250)

    NOTE: The carrying amount/tax base are determined by taking the original cost of $200,000 and deducting the accumulated depreciation/accumulated capital allowances at the end of each year.

  2. Current taxes
    2021 2022 2023 2024 2025
    Accounting profit (loss) reported 150,000 60,000 (440,000) (80,000) 350,000
    Temporary difference:

    Depreciation expense

    20,000 20,000 20,000 20,000 20,000

    Capital allowance claimed for

    tax purposes

    (35,000) (30,000) 0 0 (25,000)
    Taxable profit (loss) 135,000 50,000 (420,000) (60,000) 345,000
    Enacted tax rate 25% 30% 35% 35% 30%
    Tax payable (refund) 33,750 15,000 (48,750)* 0** 15,000***

    * In 2023, a tax refund is generated as follows:

    Tax loss applied to 2021 taxable profit 135,000
    Rate 25%
    Refund 33,750
    Tax loss applied to 2022 taxable profit 50,000
    Rate 30%
    Refund 15,000
    Total refund and tax income for the year $48,750

    ** In 2024, the additional loss cannot be carried back, as there are no further taxable profits to apply it against. Therefore, no tax refund is generated.

    *** In 2025, the current tax payable is determined as follows:

    Taxable profit 345,000
    Less loss carry forward applied:

    2023 tax loss

    (420,000)

    Applied to 2021

    135,000

    Applied to 2022

    50,000

    2024 loss

    (60,000)

    Total loss available in 2025

    (295,000)
    Taxable profit after loss carry forward applied 50,000
    Tax rate 30%
    Tax payable 15,000
  3. 2023 2024
    Opening balance of loss 0 (235,000)
    Current tax loss/profit (420,000) (60,000)
    Carried back to 2021 and 2022 185,000
    Balance to carry forward (235,000) (295,000)
    Probability of use 80% 10%
    Expected benefit (188,000) 0
    Tax rate 35% 35%
    Deferred tax asset 65,800 0
    Opening balance 0 65,800
    Adjustment required 65,800 (65,800)

    In 2024, management’s estimate of its ability to utilize the tax losses has dropped to 10%, which means it is no longer probable that the asset can be realized. At this point, the asset should be derecognized.

    In 2025, the balance of the loss ($295,000) can be fully used against current taxable profit ($345,000). In 2025, the company will record current tax income of $295,000 × 30% = $88,500. This will offset the current tax expense of $345,000 × 30% = $103,500, leaving a net current tax expense of $15,000. Although there is no deferred tax adjustment as the asset was previously derecognized, disclosure of the two different components of current tax expense will be required.

  4. 2021 2022 2023 2024 2025
    Current tax expense (income) 33,750 15,000 (48,750) 0 15,000

    (from part b)

    Deferred tax expense (income) – PPE 3,750 3,750 (5,750) (7,000) 2,250

    (from part a)

    Deferred tax (income) expense – loss 0 0 (65,800) 65,800 0

    (from part c)

    Total tax expense (income) 37,500 18,750 (120,300) 58,800 17,250

Exercise 15.11

  1. Current Tax:
    Amount
    Accounting profit $150,000
    Permanent differences:

    None

    Temporary differences:

    Unearned rent taxed in current year

    96,000

    Construction revenue not taxable

    (90,000)

    Capital allowance > depreciation

    (4,000)
    Taxable income 152,000
    Tax rate 30%
    Current tax payable $45,600

    Future Tax:

    Item Carrying Amount Tax Base Temp. Diff. Rate Deferred Tax
    Unearned rent revenue (96,000) 0 96,000 30% 28,800
    Construction revenue 90,000 0 (90,000) 30% (27,000)
    PPE 108,000 119,000 11,000 30% 3,300
    Total 5,100
    Opening bal. 4,500
    Adjustment 600

    NOTE: Opening balance = (135,000\;-\;120,000)\;\times\;30\%\;=\;4,500\;DR

    Summary:

    Current tax expense $(45,600)
    Future tax benefit 600
    Total tax expense $(45,000)
  2. Balance sheet presentation
    Non-current assets

    Future income taxes

    $17,700
    Current liabilities

    Income taxes payable

    45,600

    Future income taxes

    12,600

    NOTE:
    Non-current future tax asset = 3,300\;+\;(1\;\div\;2\;\times\;28,800)

    Current future tax liability = 27,000\;-\;(1\;\div\;2\;\times\;28,800)

     

    One-half of the future tax related to unearned revenue is classified as current and one-half as non-current because this is way in which the underlying unearned revenue would be classified. The future tax related to construction revenue is classified as current because the underlying construction in process account would be classified this way. The future tax related to the PPE is classified as non-current because PPE would be classified as non-current.

  3. Income Statement Presentation:
    Income tax expense $(45,600)

    Balance Sheet Presentation:

    Current liabilities

    Income tax payable

    $45,600

    No future tax amounts are recorded.


Exercise 15.12

1. Deferred tax asset or liability

Balance Sheet

Tax Base

Accounting Base

Difference

Tax %

DTA (DTL)

Notes

UCC -$10,500 $- -$10,500 20% -$2,100 DTL (since negative)

2. Taxable income

Accounting income $103,600
Permanent difference:
CEO Life insurance 6,820 add back since NOT deductible for tax purposes
Temporary difference
CCA > Depreciation -10,500 from above
Taxable income 99,920
Tax rate 20%
Income tax expense $19,984
Note: CCA = Capital Cost Allowance

3. Journal entries

Current tax expense 19,984
Income tax payable 19,984
to record current taxes based on taxable income
Deferred tax expense 2,100
Deferred tax Liability 2,100
to record deferred taxes based on temporary difference

4. Partial income statement

Income before taxes $103,600
Income tax
Current 19,984
Deferred 2,100 22,084
Net income $81,516


Exercise 15.13

1. Deferred tax asset or liability

Balance Sheet

Tax Base

Accounting Base

Difference

Tax %

DTA (DTL)

Notes

Warranty $- -$75,000 $75,000 30% $22,500 DTA (positive)
UCC -$124,900 $- -$124,900 30% -$37,470 DTL (negative)
-$14,970 DTL (net)

2. Taxable income

Accounting income $347,800
Permanent difference:
CEO Life insurance 14,550 add back since NOT deductible for tax purposes
Fines and penalties 10,250
Temporary difference
Warranties 75,000
CCA > Depreciation -124,900
Taxable income 322,700
Tax rate 30%
Income tax expense $96,810
Note: CCA = Capital Cost Allowance

3. Journal entries

Current tax expense 96,810
Income tax payable 96,810
to record current taxes based on taxable income
Deferred tax expense 14,970
Deferred tax Liability 14,970
to record deferred taxes based on temporary difference

4. Partial income statement

Income before taxes $347,800
Income tax
Current 96,810
Deferred 14,970 111,780
Net income $236,020


Exercise 15.14

Y3 Income Tax Expense 31,575
Income Tax Payable 31,575
($126,300 × 25%)
Y4 Income Tax Expense 24,650
Income Tax Payable 24,650
($98,600 × 25%)
Y5 Income Tax Expense 11,780
Income Tax Payable 11,780
(58,900 × 20%)
Y6 Income Tax Receivable 25,400
Current Income tax Expense 25,400
apply Y6 loss to request refund from Y3 ($101,600 × 25%)
Y7 Income Tax Receivable 42,605
Income tax benefit 42,605
remaining income from Y3 24,700 × 25% 6,175
request refund from Y4 98,600 × 25% 24,650
request refund from Y5 58,900 × 20% 11,780
loss used 182,200 42,605
(refund of prior taxes)
available loss 198,500
to carryforward 16,300 × 20% 3,260
Y7 Deferred tax asset 3,260
Deferred tax expense 3260
to record carryforward amount to apply (see above)
Y8 Income Tax Expense 14,640
Income Tax Payable 14,640
($89,500 × 20%) - ($16,300 × 20%)
Deferred tax expense 3,260
Deferred tax asset 3,260
Y9 Income Tax Expense 41,280
Income Tax Payable 41,280
($206,400 × 20%)

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