Melissa
Inc. reports accounting income of $105,000 for 2011. The following items cause
taxable income to be different than income reported on the financial
statements.
1.
Capital cost allowance (on the tax return) is greater than depreciation on the income
statement by $16,000.
2.
Rent reported on the tax return is $24,000 higher than rent earned on the
income statement.
3.
Non-deductible fines for pollution appear as an expense of $15,000 on the
income statement.
4.
Melissa’s tax rate is 30% for all years and the company expects to report
taxable income in all future years. There are no future taxes at the beginning
of 2011. Melissa reports under the PE GAAP future income taxes method.
Instructions
(a)
Calculate taxable income and income taxes payable for 2011.
(b)
Calculate any future income tax balances at December 31, 2011.
(c)
Prepare the journal entries to record income taxes for 2011.
(d)
Prepare the income tax expense section of the income statement for 2011,
beginning with the line “Income before income taxes.”
(e)
Reconcile the statutory and effective rates of income tax for 2011.
(f)
Provide the balance sheet presentation for any resulting future tax balance
sheet accounts at December 31, 2011. Be specific about the classification.
(g)
Repeat part (f) assuming Melissa follows IFRS.
(a)
Accounting income $105,000
Permanent differences:
Non-deductible
fines 15,000
120,000
Reversing differences:
Excess of
CCA over depreciation
(16,000 )
Excess rent
collected over rent earned 24,000
Taxable income $128,000
Current income taxes – 30% $38,400
(b)
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Deductible
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Balance
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(Taxable)
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Future
Tax
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Current
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Sheet
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Temporary
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Tax
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Asset
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Long-
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Account
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Differences
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X
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Rate
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(Liability)
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Term
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PP &
E
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($16,000)*
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30%
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($4,800)
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LT
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Unearned
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Rent revenue
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24,000
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30%
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7,200
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C
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Future income tax asset, Dec. 31, 2011 2,400
Future income tax asset before adjustment 0
Incr. in future income tax asset and future
income tax
benefit for 2011 $2,400
* Carrying amount and
tax basis are not given in the exercise, only the net difference is provided.
(c) Current
Income Tax Expense............ 38,400
Income
Tax Payable................ 38,400
Future
Income Tax Asset............... 7,200*
Future
Income Tax Benefit......... 2,400
Future
Income Tax Liability....... 4,800*
*or a net debit to Future Income Tax Asset of $2,400
Because of a flat tax rate, these totals can be
reconciled:
($24,000 – $16,000) X 30% = $7,200 + ($4,800).
(d) Income
before income taxes $105,000
Income tax
expense
Current $38,400
Future
benefit (2,400 ) 36,000
Net income $69,000
(e)
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Divided by
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Accounting
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@ 30%
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Income
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Accounting income
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$ 105,000
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$ 31,500
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30.0%
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Non-deductible fines
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15,000
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4,500
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4.3%
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$ 36,000
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34.3%
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Effective tax rate
($36,000/$105,000)
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34.3%
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(f) Current assets
Future income
tax asset $7,200
Non-Current
liabilities
Future Income
Tax Liability 4,800
(g) Non-current
assets
Future income tax asset $2,400
