Use
the information for Sorpon Corporation in E18-6, and assume that the company
reports accounting income of $180,000 in each of 2012 and 2013, and no
reversing differences other than the one identified in E18-6. In addition, assume
now that Sorpon Corporation was informed on December 31, 2012, that the enacted
rate for 2013 and subsequent years is 35%.
In
BE Sorpon Corporation purchased equipment very late in 2011. Based on generous
capital cost allowance rates provided in the Income Tax Act, Sorpon Corporation
claimed CCA on its 2011 tax return but did not record any depreciation as the
equipment had not yet been put into use. This temporary difference will reverse
and cause taxable amounts of $25,000 in 2012, $30,000 in 2013, and $40,000 in
2014. Sorpon's accounting income for 2011 is $200,000 and the tax rate is 40%
for all years. There are no future tax accounts at the beginning of 2011.
Instructions
(a)
Calculate the future income tax balances at December 31, 2012 and 2013.
(b)
Calculate taxable income and income taxes payable for 2012 and 2013.
(c)
Prepare the journal entries to record income taxes for 2012 and 2013.
(d)
Prepare the income tax expense section of the income statements for 2012 and
2013, beginning with the line “Income before income taxes.”
(a) 2012
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Balance
|
|
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Deductible
|
|
|
|
Sheet
|
|
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(Taxable)
|
|
Future Tax
|
|
Account
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Carrying
|
Tax
|
Temporary
|
Tax
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Asset
|
|
Dec. 31, 2012
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Amount*
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Basis*
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Differences
|
Rate
|
(Liability)
|
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Equipment
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$0
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($70,000)
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($70,000)
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35%
|
($24,500)
|
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Future income tax
liability, December 31, 2012
|
(24,500)
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||||
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Future income tax
liability before adjustment
|
(38,000)
|
||||
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Decrease in future income
tax liability and future income tax benefit for 2012
|
$13,500
|
||||
* Values not provided in this exercise
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Future years
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|||||
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|
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Total
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2013
|
|
2014
|
|
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(Taxable) temporary differences
|
|
|
|
|
|
|
|
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Depreciation in excess of CCA
|
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$70,000
|
|
$30,000
|
|
$40,000
|
|
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Tax rate enacted for the year
|
|
|
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35%
|
|
35%
|
|
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Future tax (liability)
|
|
$24,500
|
|
$10,500
|
|
$14,000
|
|
EXERCISE 18-8 (Continued)
(a) (Continued) 2013
|
Balance
|
|
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Deductible
|
|
|
|
Sheet
|
|
|
(Taxable)
|
|
Future Tax
|
|
Account
|
Carrying
|
Tax
|
Temporary
|
Tax
|
Asset
|
|
Dec. 31, 2013
|
Amount*
|
Basis*
|
Differences
|
Rate
|
(Liability)
|
|
Equipment
|
$0
|
($40,000)
|
($40,000)
|
35%
|
($14,000)
|
|
Future income tax liability,
December 31, 2013
|
(14,000)
|
||||
|
Future income tax
liability before adjustment
|
(24,500)
|
||||
|
Decrease in future income
tax liability and future income tax benefit for 2013
|
$10,500
|
||||
* Values not provided in this exercise
|
|
|
Future year
|
||||
|
|
|
Total
|
|
2014
|
|
|
|
(Taxable)
temporary differences
|
|
|
|
|
|
|
|
Depreciation in excess of
CCA
|
|
$40,000
|
|
$40,000
|
|
|
|
Tax rate enacted for the
year
|
|
|
|
35%
|
|
|
|
Future tax (liability)
|
|
$14,000
|
|
$14,000
|
|
|
(b)
|
|
2012
|
|
2013
|
|
Pretax accounting income
|
$ 180,000
|
|
$ 180,000
|
|
Reversing differences –
|
|
|
|
|
CCA < depreciation expense
|
25,000
|
|
30,000
|
|
Taxable income
|
$ 205,000
|
|
$ 210,000
|
|
|
|
|
|
|
Taxable income
|
$
205,000
|
|
$
210,000
|
|
Enacted tax rate
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X 40%
|
|
X 35%
|
|
Current income tax expense
|
$
82,000
|
|
$
73,500
|
(c)
2012
Current Income Tax Expense.............. 82,000
Income Tax
Payable.................. 82,000
Future Income Tax Liability............. 13,500
Future
Income Tax Benefit........... 13,500
2013
Current Income Tax Expense.............. 73,500
Income Tax
Payable.................. 73,500
Future Income Tax Liability............. 10,500
Future
Income Tax Benefit........... 10,500
EXERCISE 18-8 (Continued)
(d)
|
|
|
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2012
|
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Income before income taxes
|
|
|
$ 180,000
|
|
Income taxes
|
|
|
|
|
Current
|
$ 82,000
|
|
|
|
Future (Benefit)
|
(13,500)
|
|
68,500
|
|
Net Income
|
|
|
$ 111,500
|
|
|
|
|
|
|
|
|
|
2013
|
|
Income before income taxes
|
|
|
$ 180,000
|
|
Income taxes
|
|
|
|
|
Current
|
$ 73,500
|
|
|
|
Future (Benefit)
|
(10,500)
|
|
63,000
|
|
Net Income
|
|
|
$ 117,000
|
