Chapter 15

Exercise 15.1

Exercise 15.2

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. 

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. 

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. 

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. 
   (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. 
   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		$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 =
   Carrying amount PPE =
   Tax base PPE =

2. 

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 =

   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 =

   Current future tax liability =

    

   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

2. Taxable income

3. Journal entries

4. Partial income statement

Exercise 15.13

1. Deferred tax asset or liability

2. Taxable income

3. Journal entries

4. Partial income statement

Exercise 15.14