The
accounting records of Steven Corp., a real estate developer, indicated income
before taxes of $850,000 for its year
ended December 31, 2011, and of $525,000 for the year ended December 31, 2012.
The following data are also available.
1.
Steven Corp. pays an annual life insurance premium of $11,000 covering the top
management team. The company is the named beneficiary.
2.
The carrying amount of the company’s property, plant, and equipment at January
1, 2011, was $1,256,000, and the UCC at that date was $998,000. Steven recorded
depreciation expense of $175,000 and $180,000 in 2011 and 2012, respectively.
CCA for tax purposes was $192,000 and $163,500 for 2011 and 2012, respectively.
There were no asset additions or disposals over the two-year period.
3.
Steven deducted $211,000 as a restructuring charge in determining income for
2010. At December 31, 2010, an accrued liability of $199,500 (reported in
current liabilities) remained outstanding relative to the restructuring. This expense
is deductible for tax purposes, but only as the actual costs are incurred and
paid for. When the actual restructuring of operations took place in 2011 and
2012, the liability was reduced to $68,000 at the end of 2011 and $0 at the end
of 2012.
4.
In 2011, property held for development was sold and a profit of $52,000 was
recognized in income. Because the sale was made with delayed payment terms, the
profit is taxable only as Steven receives payments from the purchaser. A 10%
down payment was received in 2011, with the remaining 90% expected in equal
amounts over the following three years.
5.
Non-taxable dividends of $3,250 in 2011 and of $3,500 in 2012 were received
from taxable Canadian corporations.
6.
In addition to the income before taxes identified above, Steven reported a
before-tax gain on discontinued operations of $18,800 in 2011.
7.
A 30% rate of tax has been in effect since 2009.
Steven
Corp. follows the PE GAAP future income taxes method.
Instructions
(a)
Determine the balance of any future income tax asset or liability accounts at
December 31, 2010, 2011, and 2012.
(b)
Determine 2011 and 2012 taxable income and current income tax expense.
(c)
Prepare the journal entries to record current and future income tax expense for
2011 and 2012.
(d)
Identify how the future income tax asset or liability account(s) will be
reported on the December 31, 2011 and 2012 balance sheets.
(e)
Prepare partial income statements for the years ended December 31, 2011 and
2012, beginning with the line “Income from continuing operations before income
tax.”
(f)
How would your response to (d) change if Steven Corp. reported under IFRS?
(a)
|
PP&E
|
|
Carrying amount
|
|
UCC
|
|
Difference
|
|
Tax 30%
|
|
Future Tax
|
|||||
|
Bal. Dec. 31, 2010
|
|
$ 1,256,000
|
|
$
998,000
|
|
$
(258,000)
|
|
$ (77,400)
|
|
Liability
|
|||||
|
For 2011
|
|
175,000
|
|
192,000
|
|
(17,000)
|
|
(5,100)
|
|
|
|||||
|
Bal. Dec. 31, 2011
|
|
1,081,000
|
|
806,000
|
|
(275,000)
|
|
(82,500)
|
|
Liability
|
|||||
|
For 2012
|
|
180,000
|
|
163,500
|
|
16,500
|
|
4,950
|
|
|
|||||
|
Bal. Dec. 31, 2012
|
|
$ 901,000
|
|
$
642,500
|
|
$
(258,500)
|
|
$ (77,550)
|
|
Liability
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Restructuring Charges
|
|
Accrued Liability
|
|
Tax basis
|
|
Difference
|
|
Tax 30%
|
|
Future Tax
|
|||||
|
Bal. Dec. 31, 2010
|
|
$ (199,500)
|
|
$ -0-
|
|
$199,500
|
|
$59,850
|
|
Asset
|
|||||
|
For 2011
|
|
131,500
|
|
-0-
|
|
(131,500)
|
|
(39,450)
|
|
|
|||||
|
Bal. Dec. 31, 2011
|
|
(68,000)
|
|
-0-
|
|
68,000
|
|
20,400
|
|
Asset
|
|||||
|
For 2012
|
|
68,000
|
|
-0-
|
|
(68,000)
|
|
(20,400)
|
|
|
|||||
|
Bal. Dec. 31, 2012
|
|
$-0-
|
|
$ -0-
|
|
$ -0-
|
|
$ -0-
|
|
|
|||||
|
Profit on Property Sale
|
|
Deferred G/P deducted from A/R
|
|
Deferred
Profit for Tax
|
|
Difference
|
|
Tax 30%
|
|
Future Tax
|
|||||||||
|
Bal. Dec. 31, 2010
|
|
$ -0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
|
|||||||||
|
For 2011
|
|
-0-
|
|
$ 46,800
|
|
$ (46,800)
|
|
$ (14,040)
|
|
|
|||||||||
|
Bal. Dec. 31, 2011
|
|
-0-
|
|
46,800
|
|
(46,800)
|
|
(14,040)
|
|
Liability
|
|||||||||
|
For 2012
|
|
-0-
|
|
(15,600)
|
|
15,600
|
|
4,680
|
|
|
|||||||||
|
Bal. Dec. 31, 2012
|
|
-0-
|
|
$ 31,200
|
|
$ (31,200)
|
|
$ (9,360)
|
|
Liability
|
|||||||||
|
(b)
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||||||||||||||||||||||||||||||||||||||||||||||||
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||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Discontinued operations:
|
|
|
|
|
Accounting income
|
$ 18,800
|
|
$0
|
|
Permanent differences
|
0
|
|
0
|
|
Reversing differences
|
0
|
|
0
|
|
Taxable income
|
18,800
|
|
0
|
|
Current income taxes – 30%
|
$ 5,640
|
|
$0
|
(a) and (c)
|
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
|
$1,256,000
|
$998,000
|
($258,000)
|
30%
|
($77,400)
|
LT
|
Restructuring Liability
|
199,500
|
-0-
|
199,500
|
30%
|
59,850
|
C
|
|
Future income tax
liability, December 31, 2010
|
($17,550)
|
|
||||
|
Balance
|
|
|
Deductible
|
|
|
(PE GAAP)
|
|
Sheet
|
|
|
(Taxable)
|
|
Future Tax
|
Current
|
|
Account
|
Carrying
|
Tax
|
Temporary
|
Tax
|
Asset
|
or Long-
|
|
Dec. 31, 2011
|
Amount
|
Basis
|
Differences
|
Rate
|
(Liability)
|
Term
|
PP&E
|
$1,081,000
|
$806,000
|
($275,000)
|
30%
|
($82,500)
|
LT
|
Restructuring Liability
|
68,000
|
-0-
|
68,000
|
30%
|
20,400
|
C
|
Deferred G/P on Sale (A/R)
|
-0-
|
46,800
|
(46,800)
|
30%
|
(14,040)
|
C*
|
|
Future income tax
liability, December 31, 2011
Future income tax
liability before adjustment
Incr. in future income tax
liability and future income tax expense for 2011
|
(76,140)
(17,550)
$(58,590)
|
|
||||
* assumes that all of the A/R is reported in current assets
|
Balance
|
|
|
Deductible
|
|
|
(PE GAAP)
|
|
Sheet
|
|
|
(Taxable)
|
|
Future Tax
|
Current
|
|
Account
|
Carrying
|
Tax
|
Temporary
|
Tax
|
Asset
|
Long-
|
|
Dec. 31, 2012
|
Amount
|
Basis
|
Differences
|
Rate
|
(Liability)
|
Term
|
PP&E
|
$901,000
|
$642,500
|
($258,500)
|
30%
|
($77,550)
|
LT
|
Restructuring Liability
|
-0-
|
-0-
|
-0-
|
30%
|
-0-
|
C
|
Deferred G/P on Sale (A/R)
|
-0-
|
31,200
|
(31,200)
|
30%
|
(9,360)
|
C*
|
|
Future income tax
liability, December 31, 2012
Future income tax
liability before adjustment
Incr. in future income tax
liability and future income tax expense for 2012
|
(86,910)
(76,140)
($10,770)
|
|
||||
(c) December 31, 2011
Current Income Tax Expense................ 198,735
Income Tax Expense – Discontinued Operations 5,640
Income Tax
Payable ................... 204,375
Future Income Tax Expense................. 58,590
Future
Income Tax Liability....... 58,590
December
31, 2012
Current Income Tax Expense.............. 148,980
Income Tax
Payable ($495,350 X .30). 148,980
Future Income Tax Expense............... 10,770
Future
Income Tax Liability......... 10,770
(d) The
following presentation is based on the assumption that the Account Receivable
for the property sold in 2011 is all included in current assets. If the company
reported part of it in non-current assets, 2/3 of the related future income tax
liability in 2011 and 1/2 of the related future income tax liability in 2012
would have to be reported as long-term.
Balance
sheet 2011
Current assets:
Future tax asset ($20,400 – $14,040) $6,360
Non-current liabilities:
Future tax liability 82,500
Balance sheet 2012
Current liability:
Future tax liability $9,360
Non-current liabilities:
Future tax liability 77,550
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 – 2011
|
|
|
|
|
|
|
Income from continuing operations before income
taxes
|
|
$850,000
|
|||
|
Income taxes
|
|
|
|
|
|
|
Current income taxes
|
|
|
$198,735
|
|
|
|
Future income taxes
|
|
|
58,590
|
|
257,325
|
|
Income from continuing
operations
|
|
|
|
592,675
|
|
|
Discontinued operations
|
|
|
|
|
|
|
Gain on disposal of operations
|
|
18,800
|
|
|
|
|
Less applicable taxes
|
|
|
5,640
|
|
13,160
|
|
Net income
|
|
|
|
|
$605,835
|
|
Income Statement – 2012
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
$525,000
|
|
Income taxes
|
|
|
|
|
|
|
Current income taxes
|
|
|
$ 148,980
|
|
|
|
Future income taxes
|
|
|
10,770
|
|
159,750
|
|
Net income
|
|
|
|
|
$365,250
|
(f)
Balance sheet 2011
Non-current liabilities:
Future tax liability ($82,500 – $6,360) $76,140
Balance sheet 2012
Non-current liabilities:
Future tax liability
($77,550 – $9,360) $68,190
IFRS require that all deferred tax assets and
liabilities be reported as non-current items on a classified statement of
financial position.
