The
following information was disclosed during the audit of Shawna Inc.
Amount
Due per
Year Tax Return
2011
……………………. $140,000
2012
……………………. 112,000
1.
On January 1, 2011, equipment was purchased for $400,000. For financial
reporting purposes, the company uses straight-line depreciation over a
five-year life, with no residual value. For tax purposes, the CCA rate is 25%.
2.
In January 2012, $225,000 was collected in advance for the rental of a building
for the next three years. The entire $225,000 is reported as taxable income in
2012, but $150,000 of the $225,000 is reported as unearned revenue on the December
31, 2012 balance sheet. The $150,000 of unearned revenue will be earned equally
in 2013 and 2014.
3.
The tax rate is 40% in 2011 and all subsequent periods.
4.
No temporary differences existed at the end of 2010. Shawna expects to report
taxable income in each of the next five years. Its fiscal year ends December
31.
Shawna
Inc. follows IFRS.
Instructions
(a)
Calculate the amount of capital cost allowance and depreciation expense for
2011 and 2012, and the corresponding carrying amount and undepreciated capital
cost of the depreciable assets at December 31, 2011 and 2012.
(b)
Determine the balance of the future income tax asset or liability account at
December 31, 2011, and indicate the account’s classification on the balance
sheet.
(c)
Prepare the journal entry(ies) to record income taxes for 2011.
(d)
Draft the bottom of the income statement for 2011, beginning with “Income
before income taxes.”
(e)
Determine the balance of the future income tax asset or liability account at
December 31, 2012, and indicate the account’s classification on the December
31, 2012 balance sheet.
(f)
Prepare the journal entry(ies) to record income taxes for 2012.
(g)
Prepare the bottom of the income statement for 2012, beginning with “Income
before income taxes.”
(h)
Provide the comparative balance sheet presentation for the future tax balance
sheet accounts at December 31, 2011 and 2012. Be specific about the classification.
(i)
Is it possible to have more than two accounts for future taxes reported on a
balance sheet? Explain.
(j)
How would your response to (h) change if Shawna Inc. reported under the PE GAAP
future income taxes method?
(a)
Basic
Calculations of Capital Cost Allowance, Depreciation and Balances:
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C – B
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(A)
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(B)
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A – B
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(C)
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Carrying
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Reversing
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Year
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Base
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CCA
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UCC
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Deprec.
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Amount
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Difference
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2011
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$400,000
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X 25 % X .5
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$ 50,000
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$ 350,000
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$80,000
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$320,000
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$30,000
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2012
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350,000
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X 25 %
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87,500
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262,500
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80,000
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240,000
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(7,500)
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(b)
2011
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Balance Sheet
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Deductible
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Future
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(PE GAAP)
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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Tax
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Tax
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or Long-
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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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Asset
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Term
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Property, plant, & equip.
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$320,000
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$350,000
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$30,000
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40%
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$12,000
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LT
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Future income tax asset,
December 31, 2011
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12,000
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Future income tax account
before adjustment
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0
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Incr. in future income tax
asset and future income tax benefit for 2011
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$12,000
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(c)
Future Income Tax Asset................. 12,000
Future
Income Tax Benefit.... 12,000
Current
Income Tax Expense.......... 140,000
Income
Tax Payable.............. 140,000
(amount
given in the problem)
$140,000 taxes due for 2011 ÷ 40% (2011 tax
rate) = $350,000 taxable income for 2011.
(d) Income
before income taxes $320,000 a
Income tax
expense
Current $140,000
Future
benefit (12,000 ) 128,000
Net income $192,000
aPretax
accounting income $ X
Excess
depreciation per books [from (a) above] 30,000
Taxable
income [from (c) above] $350,000
Solving for X; X + $30,000 = $350,000; X = $320,000
pretax accounting income.
(e)
2012
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Balance Sheet
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Deductible
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Future
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(PE GAAP)
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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Tax
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Tax
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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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Rate
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Asset
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Term
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Property, plant & equip.
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$240,000
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$262,500
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$22,500
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40%
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$9,000
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LT
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Unearned Rev. – current
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75,000*
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0
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75,000
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40%
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30,000
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C
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Unearned Rev. – non-curr.
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75,000*
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0
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75,000
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40%
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30,000
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LT
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Future income tax asset,
December 31, 2012
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69,000
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Future income tax asset
before adjustment
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12,000
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Incr. in future income tax
asset and future income tax benefit for 2012
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$57,000
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* $150,000 unearned at end of 2012 divided by 2 years
(2013 and 2014)
(f)
Future Income Tax Asset................. 57,000
Future
Income Tax Benefit....... 57,000
Current
Income Tax Expense.......... 112,000
Income
Tax Payable.............. 112,000
(amount given in
the problem)
$112,000 taxes due
for 2012 ÷ 40% (2011 tax rate) = $280,000 taxable income for 2012
(g) Income
before income taxes $137,500 d
Income tax
expense
Current $112,000
Future (57,000 ) 55,000
Net income $ 82,500
dPretax
accounting income $ X
CCA in
excess of depreciation [from (a) above] (7,500)
Excess rent
collected over rent earned 150,000
Taxable
income [from (f) above] $280,000
Solving for X:
X + $150,000 – $7,500 = $280,000
X = $137,500 pretax accounting income.
(h) Refer to
last column in tables of part (a) and (e) above.
2012 2011
Current assets
Future
income tax asset $69,000 $12,000
($30,000 + $30,000 + $9,000)
IFRS require that all deferred tax assets and liabilities
be reported as non-current items on a classified statement of financial
position.
(i) When
financial statements of several legal entities are consolidated into one for
financial reporting purposes, the possibility exists that future tax accounts
could have original classifications on the individual balance sheets that are
not in common or are related to taxes from different jurisdictions. Since there is no right to offset taxes
between jurisdictions, there is a possibility of having four captions for
future taxes on the consolidated balance sheet under PE GAAP. For example, there could be two current and
two long term future tax asset/liability accounts (two for each entity). Under
IFRS there would be two future tax asset/liability accounts (one for each
entity) since deferred tax assets/liabilities are classified as non-current
items on a classified statement of financial position.
(j)
Refer to last column in tables of part (a) and (e)
above.
2012 2011
Current assets
Future
income tax asset $30,000
Non-current assets
Future
income tax asset 39,000* $12,000
*($30,000 + $9,000)
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.
