Use the information for Sorpon Corporation in E18-6, and assume

Use the information for Sorpon Corporation in E18-6, and assume that the company reports accounting income of $180,000 in each of 2012 and 2013, and no reversing differences other than the one identified in E18-6. In addition, assume now that Sorpon Corporation was informed on December 31, 2012, that the enacted rate for 2013 and subsequent years is 35%.

In BE 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 balances at December 31, 2012 and 2013.

(b) Calculate taxable income and income taxes payable for 2012 and 2013.

(c) Prepare the journal entries to record income taxes for 2012 and 2013.

(d) Prepare the income tax expense section of the income statements for 2012 and 2013, beginning with the line “Income before income taxes.”

(a) 2012

Balance			Deductible
Sheet			(Taxable)		Future Tax
Account	Carrying	Tax	Temporary	Tax	Asset
Dec. 31, 2012	Amount*	Basis*	Differences	Rate	(Liability)
Equipment	$0	($70,000)	($70,000)	35%	($24,500)
Future income tax liability, December 31, 2012					(24,500)
Future income tax liability before adjustment					(38,000)
Decrease in future income tax liability and future income tax benefit for 2012					$13,500

* Values not provided in this exercise

		Future years
		Total		2013		2014
(Taxable) temporary differences
Depreciation in excess of CCA		$70,000		$30,000		$40,000
Tax rate enacted for the year				35%		35%
Future tax (liability)		$24,500		$10,500		$14,000

EXERCISE 18-8 (Continued)

(a) (Continued) 2013

Balance			Deductible
Sheet			(Taxable)		Future Tax
Account	Carrying	Tax	Temporary	Tax	Asset
Dec. 31, 2013	Amount*	Basis*	Differences	Rate	(Liability)
Equipment	$0	($40,000)	($40,000)	35%	($14,000)
Future income tax liability, December 31, 2013					(14,000)
Future income tax liability before adjustment					(24,500)
Decrease in future income tax liability and future income tax benefit for 2013					$10,500

* Values not provided in this exercise

		Future year
		Total		2014
(Taxable) temporary differences
Depreciation in excess of CCA		$40,000		$40,000
Tax rate enacted for the year				35%
Future tax (liability)		$14,000		$14,000

(b)

	2012		2013
Pretax accounting income	$ 180,000		$ 180,000
Reversing differences –
CCA < depreciation expense	25,000		30,000
Taxable income	$   205,000		$   210,000
Taxable income	$   205,000		$   210,000
Enacted tax rate	X 40%		X 35%
Current income tax expense	$   82,000		$   73,500

(c)

2012

Current Income Tax Expense..............   82,000

    Income Tax Payable..................           82,000

Future Income Tax Liability.............   13,500

    Future Income Tax Benefit...........           13,500

2013

Current Income Tax Expense..............   73,500

    Income Tax Payable..................           73,500

Future Income Tax Liability.............   10,500

    Future Income Tax Benefit...........           10,500

EXERCISE 18-8 (Continued)

(d)

			2012
Income before income taxes			$ 180,000
Income taxes
Current	$   82,000
Future (Benefit)	(13,500)		68,500
Net Income			$ 111,500
			2013
Income before income taxes			$ 180,000
Income taxes
Current	$   73,500
Future (Benefit)	(10,500)		63,000
Net Income			$   117,000