Anthony
Ltd. began business on January 1, 2011. At December 31, 2011, it had a $3,000
balance in the future tax liability account that pertains to property, plant,
and equipment previously acquired at a cost of $1 million. The tax basis of
these assets at December 31, 2011, was $940,000; the accounting basis was
$950,000. Anthony's income before taxes for 2012 was $80,000. Anthony Ltd.
follows the PE GAAP future income taxes method.
The
following items caused the only differences between accounting income before
income taxes and taxable income in 2012:
1.
In 2012, the company paid $75,000 for rent; of this amount, $25,000 was
expensed in 2012. The other $50,000 will be expensed equally over the year 2013
and 2014 accounting periods. The full $75,000 was deducted for tax purposes in
2012.
2.
Anthony Ltd. pays $12,000 a year for a membership in a local golf club for the
company's president.
3.
Anthony Ltd. now offers a one-year warranty on all its merchandise sold.
Warranty expenses for 2012 were $12,000. Cash payments in 2012 for warranty
repairs were $6,000.
4.
Meals and entertainment expenses (only 50% of which are ever tax deductible)
were $16,000 for 2012.
5.
Depreciation expense was $50,000 and CCA was $55,000 for 2012. No new assets
were acquired in the year, and there were no asset disposals.
Income
tax rates have not changed over the past five years.
Instructions
(a)
Calculate the balance in the Future Income Tax Asset/Liability account at
December 31, 2012.
(b)
Calculate income taxes payable for 2012.
(c)
Prepare the journal entries to record income taxes for 2012.
(d)
Prepare the income tax expense section of the income statement for 2012,
beginning with the line "Income before income taxes."
(e)
Indicate how future income taxes should be presented on the December 31, 2012
balance sheet.
(f)
How would your response to (e) change if Anthony reported under IFRS?
(a)
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Balance
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Deductible
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Tax
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Future
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(PE GAAP)
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Sheet
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|
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(Taxable)
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Rate
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Tax
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Current
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Account
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Carrying
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Tax
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Temporary
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(see
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Asset
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or Long-
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Dec. 31, 2012
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Amount
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Basis
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Differences
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below)
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(Liability)
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Term
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Property, plant & equip.
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$900,000*
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$885,000**
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($15,000)
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30%
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($4,500)
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LT
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Prepaid Rent (2013 expense)
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25,000
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-0-
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(25,000)
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30%
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(7,500)
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C
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Prepaid Rent (2014 expense)
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25,000
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-0-
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(25,000)
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30%
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(7,500)
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LT
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Warranty Liability
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6,000
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-0-
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6,000
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30%
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1,800
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C
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Future income tax
liability, December 31, 2012
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(17,700)
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||||
Future income tax liability
before adjustment
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(3,000)
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||||
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Incr. in future income tax
liability and future income tax expense for 2012
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($14,700)
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||||
* ($950,000 – $50,000 = $900,000)
** ($940,000 – $55,000 = $885,000)
Taxable temporary difference, Dec. 31, 2011 X tax
rate = Future tax liability, Dec. 31, 2011
($950,000 – $940,000) X tax rate = $3,000
Tax rate = 30%
(b)
Accounting income $80,000
Permanent differences:
50% of meals
expense ($16,000 X 50%) $8,000
Golf Club
fees 12,000 20,000
100,000
Reversing differences:
Depreciation 50,000
Capital cost
allowance (55,000) (5,000 )
Rent paid (75,000)
Rent expense 25,000
(50,000)
Warranty
expense 12,000
Warranty
payments (6,000) 6,000
Taxable income $51,000
Current income taxes – 30% $15,300
(c) Current
Income Tax Expense....... 15,300
Income
Tax Payable............. 15,300
Future
Income Tax Expense.......... 14,700
Future
Income Tax Liability.... 14,700
(d)
Income before income taxes $80,000
Income taxes
Current $15,300
Future 14,700 30,000
Net income $50,000
(e)
Balance sheet, December 31, 2012
Current liabilities:
Future tax liabilities: ($7,500 – $1,800) $5,700
Non-current liabilities:
Future tax liability ($7,500 + $4,500) 12,000
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.
(f)
Balance sheet, December 31, 2012
Non-current liabilities:
Future tax liability ($12,000 + $5,700) $17,700
IFRS require that all deferred tax assets and liabilities
be reported as non-current items on a classified statement of financial
position.
