Geoff
Corp.'s operations in 2011 had mixed results. One division, Vincent Group,
again failed to earn income at a rate that was high enough to justify its
continued operation, and management therefore decided to close the division.
Vincent Group earned revenue of $118,000 during 2011 and recognized total
expenses of $110,500. The remaining two divisions reported revenues of $273,000
and total expenses of $216,000 in 2011.
In
preparing the annual income tax return, Geoff Corp.'s controller took into
account the following information:
1.
The CCA exceeded depreciation expense by $3,700. There were no depreciable
assets in the Vincent Group division.
2.
Included in Vincent's expenses is an accrued litigation loss of $5,100 that is
not deductible for tax purposes until 2012.
3.
Included in the continuing divisions' expenses are the president's golf club
dues of $4,500, and included in their revenues are $1,700 of dividends from
taxable Canadian corporations.
4.
There were no future tax account balances for any of the divisions on January
1, 2011.
5.
The tax rate for 2011 and future years is 35%.
6.
Geoff Corp. reports under IFRS.
Instructions
(a)
Calculate the taxable income and income taxes payable by Geoff Corp. in 2011
and the future income tax asset or liability balances at December 31, 2011.
(b)
Prepare the journal entry(ies) to record income taxes for 2011.
(c)
Indicate how income taxes will be reported on the income statement for 2011 by
preparing the bottom portion of the statement, beginning with "Income
before taxes and discontinued operations." Assume that 10,000 common
shares were outstanding throughout 2011.
(d)
Provide the balance sheet presentation for any resulting future tax balance
sheet accounts at December 31, 2011. Be specific about the classification.
(e)
How would your response to (d) change if Geoff Corp. followed the PE GAAP
future income taxes method?
(a)
Calculation
of current income tax expense:
|
|
Income
from
Continuing
Operations
|
Discontinued
Operations
|
Total
|
|
Accounting
income:
|
|
|
|
|
Revenue
|
$273,000
|
$118,000
|
|
|
Expenses
|
216,000
|
110,500
|
|
|
|
57,000
|
7,500
|
$64,500
|
|
Permanent
differences:
Non-taxable dividends
Golf club dues
|
(1,700)
4,500
|
|
(1,700)
4,500
|
|
Reversing
differences:
|
|
|
|
|
CCA > depreciation
|
(3,700)
|
|
(3,700)
|
|
Litigation loss
|
_______
|
5,100
|
5,100
|
|
Taxable
income
|
$56,100
|
$12,600
|
$68,700
|
|
Current income
taxes for 2011 @ 35%
|
$19,635
|
$4,410
|
$24,045
|
Calculation
of future tax expense, continuing operations:
Balance
|
|
(Taxable)
|
|
|
|
|
|
|
|
Sheet
|
|
Temporary
|
|
|
Tax
|
|
Future Tax
|
|
|
Account
|
|
Differences
|
|
X
|
Rate
|
|
(Liability)
|
|
|
PP&E
|
|
($3,700)*
|
|
|
35%
|
|
($1,295)
|
|
Future income tax liability, Dec. 31, 2011 (1,295)
Future income tax liability before adjustment 0
Incr. in future income tax liability and future
income tax
expense for 2011 for continuing operations ($1,295)
* Carrying
amount and tax basis are not given in the exercise, only the net difference is
provided.
Calculation of future
tax expense, discontinued operations:
Balance
|
|
Deductible
|
|
|
|
|
|
|
|
Sheet
|
|
Temporary
|
|
|
Tax
|
|
Future Tax
|
|
|
Account
|
|
Differences
|
|
X
|
Rate
|
|
Asset
|
|
|
Litigation Liability
|
|
$5,100*
|
|
|
35%
|
|
$1,785
|
|
Future income tax asset, Dec. 31, 2011 1,785
Future income tax asset before adjustment 0
Incr. in future income tax asset and future
income tax
benefit for 2011 – for Disc. Operations $1,785
* Carrying
amount and tax basis are not given in the exercise, only the net difference is
provided.
(b) Current
Income Tax Expense...................................... 19,635
Current
Income Tax Expense –
Discontinued Operations....................................... 4,410
Income
Tax Payable.......................................... 24,045
Future
Income Tax Expense.....................................
1,295
Future
Income Tax Liability.............................. 1,295
Future
Income Tax Asset...........................................
1,785
Future
Income Tax Benefit –
Discontinued Operations............................. 1,785
(c)
|
Income
before income taxes and discontinued operations
|
|
$
57,000
|
|
|
Income taxes
|
|
|
|
|
Current
income taxes
|
$ 19,635
|
|
|
|
Future
income tax expense
|
1,295
|
20,930
|
|
|
Income from continuing operations
|
|
36,070
|
|
|
Income from discontinuing operations
|
7,500
|
|
|
|
Net of
applicable income taxes:
|
|
|
|
|
Current income taxes
|
$4,410
|
|
|
|
Future income tax benefit
|
(1,785)
|
2,625
|
4,875
|
|
Net Income
|
|
$40,945
|
|
Earnings
per share:
Income from continuing operations
|
$3.60
|
|
Income from discontinuing operations
|
0.49
|
|
Net Income
|
$4.09
|
(d)
Non-current assets
Future income tax asset ($1,785 – $1,295) $490
IFRS require that all deferred tax assets and
liabilities be reported as non-current items on a classified statement of
financial position.
(e)
Current assets
Future
income tax asset $1,785
Non-current
liabilities
Future income tax liability 1,295
Under PE GAAP, 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.
