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 balance at December 31, 2011.
(b)
Calculate taxable income and income taxes payable for 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."
(a)
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Balance
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Deductible
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Sheet
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(Taxable)
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Future Tax
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Account
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Carrying
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Tax
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Temporary
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Tax
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Asset
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Dec. 31, 2011
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Amount*
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Basis*
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Differences
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Rate
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(Liability)
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Equipment
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$0
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$(95,000)
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($95,000)
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40%
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($38,000)
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Future income tax
liability, December 31, 2011
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(38,000)
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||||
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Future income tax
liability before adjustment
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0
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||||
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Increase in future income
tax liability and future income tax expense for 2011
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($38,000)
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Future years
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||||||
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Total
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2012
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2013
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2014
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(Taxable) temporary differences
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Depreciation in excess of CCA
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$95,000
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$25,000
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$30,000
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$40,000
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Tax rate enacted for the year
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40%
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40%
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40%
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Future tax (liability)
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$38,000
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$10,000
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$12,000
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$16,000
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(b)
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2011
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Accounting income
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$200,000
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Permanent differences:
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-0-
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Reversing difference:
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CCA greater than
Depreciation
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95,000
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Taxable income
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105,000
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Current income taxes – 40%
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$42,000
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(c)
Current Income Tax Expense................ 42,000
Income Tax
Payable.................... 42,000
Future Income Tax Expense................. 38,000
Future
Income Tax Liability........... 38,000
(d) Income
before income taxes $200,000
Income tax
expense
Current $42,000
Future 38,000 80,000
Net income $120,000
