Eloisa Corporation follows the PE GAAP future income taxes method

Eloisa Corporation follows the PE GAAP future income taxes method. Information about Eloisa Corporation’s income before taxes of $633,000 for its year ended December 31, 2011, includes the following:

1. CCA reported on the 2011 tax return exceeded depreciation reported on the income statement by $100,000. This difference, plus the $150,000 accumulated taxable temporary difference at January 1, 2011, is expected to reverse in equal amounts over the four-year period from 2012 to 2015.

2. Dividends received from taxable Canadian corporations were $15,000.

3. Rent collected in advance and included in taxable income as at December 31, 2010, totalled $60,000 for a three-year period. Of this amount, $40,000 was reported as unearned for book purposes at December 31, 2011. Unearned revenue is reported as a current liability by Eloisa if it will be recognized in income within 12 months from the balance sheet date. Eloisa paid a $2,880 interest penalty for late income tax instalments. The interest penalty is not deductible for income tax purposes at any time.

4. Equipment was disposed of during the year for $90,000. The equipment had a cost of $105,000 and accumulated depreciation to the date of disposal of $37,000. The total proceeds on the sale of these assets reduced the CCA class; in other words, no gain or loss is reported for tax purposes.

5. Eloisa recognized a $75,000 loss on impairment of a long-term investment whose value was considered impaired.

The Income Tax Act only permits the loss to be deducted when the investment is sold and the loss is actually realized. The investment was accounted for at amortized cost.

6. The tax rates are 40% for 2011, and 35% for 2012 and subsequent years. These rates have been enacted and known for the past two years.

Instructions

(a) Calculate the balance in the Future Income Tax Asset/Liability account at December 31, 2010.

(b) Calculate the balance in the Future Income Tax Asset/Liability account at December 31, 2011.

(c) Prepare the journal entries to record income taxes for 2011.

(d) Indicate how the Future Income Tax Asset/Liability account(s) will be reported on the comparative balance sheets for 2010 and 2011.

(e) Prepare the income tax expense section of the income statement for 2011, beginning with “Income before income taxes.”

(f) Calculate the effective rate of tax. Provide a reconciliation and explanation of why this differs from the statutory rate of 40%. Begin the reconciliation with the statutory rate.

(g) How would your response to (d) change if Eloisa reported under IFRS?

(a) Excess CCA over Deprec.		2012		2013		2014		2015		Total
Future taxable amounts		$   37,500		$  37,500		$   37,500		$  37,500		$ 150,000
Tax rate enacted for the year		35%		35%		35%		35%
Future tax liability		$   13,125		$  13,125		$   13,125		$  13,125		$   52,500

Unearned Rent		2011		2012		2013		Total
Future deductible amounts		$20,000		$20,000		$20,000		$60,000
Tax rate enacted for the year		40%		35%		35%
Future tax asset		$8,000		$ 7,000		$7,000		$22,000

Balance			Deductible			(PE GAAP)
Sheet			(Taxable)		Future Tax	Current
Account	Carrying	Tax	Temporary	Tax	Asset	or Long-
Dec. 31, 2010	Amount	Basis	Differences	Rate	(Liability)	Term
PP&E (table above)	*	*	($150,000)	35%	($52,500)	LT
Unearned Rent (table above)	$20,000		20,000	40%	8,000	C
Unearned Rent (table above)	40,000		40,000	35%	14,000	LT
Future income tax liability, December 31, 2010					($30,500)

* Amounts not given in the problem

(b)

Calculation of effect of disposal of equipment on temporary differences:

Original cost of disposed equipment		$ 105,000
Accumulated Depreciation of disposed equipment		(37,000)
Reduction in carrying amount of equipment		68,000
Reduction in CCA pool (UCC) for proceeds		90,000
Reversing difference in 2011		22,000									$22,000
CCA > depreciation, 2011											100,000
Excess of carrying amount over tax basis, January 1, 2011									150,000
Excess of carrying amount over tax basis, Dec.31, 2011										$272,000

Carrying amount > tax basis, equipment		2012		2013		2014		2015		Total
Future taxable amounts		$   68,000		$  68,000		$   68,000		$  68,000		$ 272,000
Tax rate enacted for the year		35%		35%		35%		35%
Future tax liability		$   23,800		$  23,800		$   23,800		$  23,800		$   95,200

Unearned Rent		2012		2013		Total
Future deductible amounts		$20,000		$ 20,000		$40,000
Tax rate enacted for the year		35%		35%
Future tax asset		$7,000		$ 7,000		$14,000

Balance			(Taxable)		Future	(PE GAAP)
Sheet			Deductible		Tax	Current
Account	Carrying	Tax	Temporary	Tax	Asset	or Long-
Dec. 31, 2011	Amount	Basis	Differences	Rate	(Liability)	Term
PP&E (table above)	*	*	($272,000)	35%	($95,200)	LT
Unearned Rent (table above)	$20,000	0	20,000	35%	7,000	C
Unearned Rent (table above)	20,000	0	20,000	35%	7,000	LT
LT Investment	*	*	75,000	35%	26,250	LT
Future income tax liability, December 31, 2011					(54,950)
Future income tax liability before adjustment					(30,500)
Incr. in future income tax liability and future income tax expense for 2011					($24,450)

* Amounts not given in the problem

(c)

    Future Income Tax Expense...........     24,450

    Future Income Tax Asset.............     18,250*

      ($26,250 + $7,000 + $7,000 – op. bal. $22,000)

    Future Income Tax Liability.........             42,700 *

      ($95,200 – op. bal. $52,500)                 

    * Alternately

        Future Income Tax Asset/Liability                  24,450

   

Accounting income		$633,000
Permanent differences:
Dividends received that are not taxable	($15,000)
Late interest penalties on tax instalments	2,880	(12,120)
		620,880
Reversing differences:
Gain on disposal of equipment		(22,000)
Impairment loss on investments		75,000
Excess of rent revenue over cash received       ($60,000 – $40,000)		(20,000)
CCA > Depreciation		(100,000)
Taxable income		$553,880
Current income taxes at 40% current rate		$221,552

    Current Income Tax Expense.......... 221,552

        Income Tax Payable..............           221,552

(d)

Balance sheet classification: (see tables in (a) and (b))

    

                                         2011       2010 

Current assets                               

    Future income tax asset             $7,000    $8,000 

Long-term liabilities

Future income tax liability         61,950    38,500

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.

(e)

Income statement presentation:
Income before income taxes						$633,000
Income taxes
Current income taxes		$ 221,552
Future income taxes		24,450				246,002
Net income						$386,998

(f)						Divided by
						Accounting
				@ 40%		Income
Accounting income		$633,000		$253,200		40.0%
Non-taxable dividends		(15,000)		(6,000)		(1.0)%
Non-deductible penalties		2,880		1,152		0.2%
				$248,352		39.2%
Net taxable temporary differences taxed at lower 35% rate:
($272,000 – $150,000) X 5% =    ($6,100)
$75,000 X 5%                        =       3,750				(2,350)		(0.4)%
				$246,002		38.8%
Effective tax rate ($246,002 / $633,000)						38.8%

The effective tax rate differs from the statutory rate because there is no tax effect on the permanent differences, and because of the deferment of taxes to the future at a 35% rate rather than the current rate of 40%.

(g)

Balance sheet classification:

                                         2011       2010 

Long-term liabilities

Future income tax liability         54,950    30,500

IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.