15.11 Exercises

Exercise 15.1

For each of the items listed below, identify whether the item is a taxable temporary difference, a deductible temporary difference, or a permanent difference.

Exercise 15.2

A company reports an accounting profit of $350,000. Included in the profit is $100,000 of proceeds from a life insurance policy for one of the key executives who passed away during the year. These proceeds are not taxable. As well, the company charged accounting depreciation that was $20,000 greater than the capital allowances claimed for tax purposes.

Required:

Calculate the amount of taxes payable and the income tax expense for the year. The current tax rate is 20%.

Exercise 15.3

In 2021, Pryderi Inc. completed its first year of operations and reports a net profit of $3,500,000, which included revenue from construction and other projects. During the year, the company started a large construction project that it expected would take two years to complete. The company uses the percentage of completion method for accounting purposes and reported a profit from this project of $900,000. All other projects were completed during the year. For tax purposes, the company reports profits on construction projects only when the project is finished. Also, the company reported the following with respect to its property, plant, and equipment:

Note: The currently enacted corporate tax rate is 30%.

Required:

1. Calculate the year-end balances for deferred taxes and current taxes payable.
2. Prepare the journal entries to record the taxes for 2021.
3. Prepare the income statement presentation of the tax amounts.

Exercise 15.4

Refer to the facts presented in the Exercise 15–3. In 2022, Pryderi Inc. completed the construction project that it began in 2021 and reported a further profit from the project of $600,000. The total amount of profit earned on the project is taxable in 2022. The company also completed other projects during the year and reported a net profit of $3,700,000. At the end of 2022, the company reported the following with respect to its property, plant, and equipment:

Note: The tax rate has remained unchanged at 30%.

Required:

1. Calculate the year-end balances for deferred taxes and current taxes payable.
2. Prepare the journal entries to record taxes for 2022.
3. Prepare the income statement presentation of the tax amounts.

Exercise 15.5

Corin Ltd. began operations in 2021 and reported a deferred tax liability balance of $17,500 at the end of that year. This balance resulted from the difference between the amount of depreciation charged for accounting purposes and the capital allowances claimed for tax purposes. The carrying amount of the asset in the company’s accounting records on December 31, 2021, was $320,000. The tax rate of 25% has not changed for several years and is not expected to change in the future. Also, by the end of December 2021, all current taxes had been paid.

In 2022, the company reported the following:

• Accounting profit for the year was $416,000.
• The company began offering a one-year warranty to its customers in 2022. A warranty provision was established, resulting in a reported expense of $73,000. Actual warranty costs incurred during the year were $17,000. For tax purposes, warranty costs can only be deducted when actually paid.
• In 2022, entertainment costs of $28,000 were paid and expensed. For tax purposes, only 25% of these amounts can be claimed.
• In 2022, the company expensed depreciation of $50,000 and claimed capital allowances for tax purposes of $58,000. There were no sales or disposals of property, plant, and equipment during the year.

Required:

1. Calculate the balances of deferred taxes and current taxes payable for the year ended December 31, 2022.
2. Prepare the journal entries to record the current and deferred taxes for 2022.
3. Prepare the income statement presentation of the income tax amounts for 2022.
4. Prepare the balance sheet presentation of the current and deferred tax balances on December 31, 2022.

Exercise 15.6

Adken Enterprises reported the following accounting and taxable profits:

Note: Included in the accounting profit is $10,000 dividend income each year that is never taxable. Also, the remainder of the difference between accounting and taxable profits relates to a temporary difference, and there were no deferred taxes reported prior to 2021. The tax rate change in 2022 was not enacted until 2022.

Required:

1. Calculate the current and deferred tax expense for 2021 to 2023.
2. Calculate the amount of the deferred tax balance reported on the balance sheet for each of the three years.
3. Prepare the disclosure of the income tax expense amounts in 2022, the year of the rate change.

Exercise 15.7

Refer to the information in Exercise 15.6.

Required:

Repeat the requirements of the previous question, assuming that the rate change for 2022 was enacted in 2021. That is, the rate in effect for 2021 was 20%, but the legislation changing the rate for 2022 had already been passed by the end of 2021.

Exercise 15.8

Baden Ltd. reported the following taxable profits (losses):

Note: There are no temporary or permanent differences to account for. The management of the company believes that it is probable that future taxable profits will be available to utilize any tax losses carried forward. However, the company carries losses back whenever possible. Also, tax rate changes are not enacted until the year of the change.

Required:

1. Prepare journal entries to record the tax amounts for each year.
2. Repeat part (a) assuming that management does not believe it is probable that future taxable profits will be available to utilize tax losses carried forward.

Exercise 15.9

Genaro Publishing Ltd. is a publisher of a wide range of consumer magazines. The company reported the following on its December 31, 2021, balance sheet:

The deferred tax asset relates to two temporary differences: subscription revenue and depreciation. The company receives subscription payments in advance on the magazines it publishes, the amounts are taxed immediately when they are received, but are reported as revenue as they are earned over the subscription period. On December 31, 2021, the balance in the unearned revenue account was $247,000 and it was expected to be earned as follows:

The company’s printing equipment is currently being depreciated on a straight-line basis and the carrying amount of the equipment on December 31, 2021, was $357,000. For tax purposes, the equipment is depreciated using the declining balance method and the tax base on December 31, 2021, was $238,000. A single taxation authority assesses the company, and payments/receipts are settled on a net basis. The income tax receivable resulted from a taxable loss suffered in 2021 that was fully carried back to previous taxation years. The tax rate enacted on December 31, 2021, was 30%.

In 2022, the company reported the following:

Required:

1. Calculate the current and deferred tax expense for 2022.
2. Prepare the journal entries for the tax amounts in 2022.
3. Prepare the income statement presentation of the tax amounts for 2022.
4. Prepare the balance sheet presentation of the tax amounts, with comparatives, as on December 31, 2022.

Exercise 15.10

Zucharras Ltd. began operations in 2021. The following information is available regarding its years ended December 31 ($ amounts in ‘000s):

The depreciation relates to a single asset that was purchased early in 2021 for $200,000, and there were no other asset purchases or sales during the five years. The tax rates were enacted in each year and the changes were not known prior to the year to which they apply. In 2023, management carried back the loss to the fullest extent possible and estimated that there was an 80% probability that future taxable profits would be available to use the remaining loss carried forward. In 2024, management revised this estimate to a 10% probability, and in 2025, management utilized the maximum possible amount of the loss carried forward. In all years, management estimated that future reversals of temporary differences would be available to utilize the benefits of any deferred tax assets other than the losses carried forward.

Required:

1. Calculate the balance of the deferred tax liability or asset and related adjustment required for the temporary difference related to depreciation at the end of each year.
2. Calculate the current tax payable for each year.
3. Calculate the balance of the deferred tax asset related to the loss carried forward at the end of each the years 2023 to 2025.
4. Calculate the current, deferred, and total tax expense for each year.

Exercise 15.11

(from Appendix) Sammon Inc. reports under ASPE and has chosen to use the future income taxes method. It has reported the following regarding its income taxes:

* Note: The rent revenue collected in advance represents an amount prepaid by a tenant for the next two years. Rent is earned at the rate of $4,000 per month, is collected on December 31, 2021, and is taxable when collected.

** Note: The company commenced a single construction contract during the year. The contract revenue has been reported using the percentage of completion method, but the completed contract method is used for tax purposes. The company expects the project to be completed in 2022.

Also, there are no other temporary or permanent differences aside from those identified above. The current tax rate is 30%, which has been in effect for several years.

Required:

1. Calculate the current and future tax expenses for the year ended December 31, 2021.
2. Prepare the balance sheet presentation of the tax amounts on December 31, 2021.
3. Repeat parts (a) and (b) assuming that the company uses the taxes payable method instead.

Exercise 15.12

In Y6, Mapleton Corporation has accounting income of $103,600.

Included in the calculation of net income was the CEO’s life insurance expense of $6,820; which is not deductible for tax purposes. For tax purposes, undepreciated capital cost (UCC) was $10,500 lower than straight-line depreciation used for accounting income. The amounts
were the same in prior years. Mapleton has a December 31 year end.

Mapleton’s tax rate is 20% and follows IFRS.

Required:

1. Determine the amount of the deferred tax asset or deferred tax liability at December 31, Y6.
2. Determine the taxable income.
3. Prepare the entry to record Y6 taxes.
4. Prepare the appropriate income statement section relating to income taxes

Exercise 15.13

In Y8, Lyons Inc. has accounting income of $347,800.

Lyons has a tax rate of 30%, has a year end of December 31 and follows IFRS

Prior to Y8, Lyons had no temporary differences.

In Y8, Lyons incurred a fine of $10,250 and paid the CEO’s life insurance of $14,550.

Neither of these items are deductible for tax purposes.

Lyons recorded warranty accruals at December 31, Y8 of $75,000. The reversing difference will cause deductible amounts of $36,000 in Y9 and $39,000 in Y10. Because of specific incentives, CCA (Capital Cost Allowance) was $124,900 higher than straight-line depreciation.

Required:

1. Determine the amount of the deferred tax asset or deferred tax liability at December 31, Y8.
2. Determine the taxable income.
3. Prepare the entry to record Y8 taxes.
4. Prepare the appropriate income statement section relating to income taxes

Exercise 15.14

Kersee Corporation reported the following accounting income. For all years listed, accounting income and taxable income were the same.

The tax rate for Y3 and Y4 was 25%. The remaining years, the tax rate was 20%.

Required:

Prepare all the required and necessary journal entries of Y3 to Y9 to record income tax expense and the effects of loss carryback and carryforward.