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E18-11 (LO 2, 3, 5, 10, 11) One Reversing Difference, Future Taxable Amounts, One Rate, No

Beginning Deferred Taxes

Henry Limited had investments in securities on its statement of financial position for the first time at the end
of its fiscal year ended December 31, 2017. Henry reports under IFRS and its investments in securities are
to be accounted for at fair value through net income. During 2017, realized losses and gains on the trading of
shares and bonds resulted in investment income, which is fully taxable in the year. Henry also accrued
unrealized gains at December 31, 2017, which are not taxable until the investment securities are sold. The
portfolio of trading securities had an original cost of $314,450 and a fair value on December 31, 2017 of
$318,200. The entry recorded by Henry on December 31, 2017 was as follows:

FV-NI Investments 3,750


Investment Income or Loss 3,750

Income before income tax for Henry was $302,000 for the year ended December 31, 2017. There are no
other permanent or reversing differences in arriving at the taxable income for Henry Limited for the fiscal
year ended December 31, 2017. The enacted tax rate for 2017 and future years is 30%.

Instructions:
a) Explain the tax treatment that should be given to the unrealized gain that Henry Limited reported on its
income statement.

b) Calculate the deferred tax balance at December 31, 2017.


(Taxable)
Statement of Fin. Carrying Deferred Tax
Tax Base Temporary Tax Rate
Pos. Account Amount (Liability)
Difference

c) Calculate the current income tax for the year ended December 31, 2017.

d) Prepare the journal entries to record income taxes for 2017.


Debit Credit
e) Prepare the income statement for 2017, beginning with the line “Income before income tax.”

f) Provide the statement of financial position presentation for any resulting income tax statement of
financial position accounts at December 31, 2017. Be clear on the classification you have chosen and explain
your choice.

g) Repeat part (f) assuming Henry follows the ASPE future/deferred income taxes method and has chosen
the fair value through net income model to account for its securities investments.
Solution: E18-11 (LO 2, 3, 5, 10, 11) One Reversing Difference, Future Taxable Amounts, One
Rate, No Beginning Deferred Taxes

Henry Limited had investments in securities on its statement of financial position for the first time at the end
of its fiscal year ended December 31, 2017. Henry reports under IFRS and its investments in securities are
to be accounted for at fair value through net income. During 2017, realized losses and gains on the trading of
shares and bonds resulted in investment income, which is fully taxable in the year. Henry also accrued
unrealized gains at December 31, 2017, which are not taxable until the investment securities are sold. The
portfolio of trading securities had an original cost of $314,450 and a fair value on December 31, 2017 of
$318,200. The entry recorded by Henry on December 31, 2017 was as follows:

FV-NI Investments 3,750


Investment Income or Loss 3,750

Income before income tax for Henry was $302,000 for the year ended December 31, 2017. There are no
other permanent or reversing differences in arriving at the taxable income for Henry Limited for the fiscal
year ended December 31, 2017. The enacted tax rate for 2017 and future years is 30%.

Instructions:
a) Explain the tax treatment that should be given to the unrealized gain that Henry Limited reported on its
income statement.

The investments must be reported on the statement of financial position at their fair value. The resulting
difference between this and the tax base of the investments (cost of $314,450) represents a temporary
difference. The unrealized gain recognized is not taxable, and any unrealized loss recognized is not
deductible, until the investments are sold at a gain or at a loss. The resulting taxable temporary difference
must have the corresponding deferred tax recorded at the tax rate that Henry expects to pay (or recover in
the case of a loss) on this gain or loss in future accounting periods. In this case the enacted rate is 30% that
needs to be applied to arrive at the amount of any deferred taxes.

b) Calculate the deferred tax balance at December 31, 2017.


(Taxable)
Statement of Fin. Carrying Deferred Tax
Tax Base Temporary Tax Rate
Pos. Account Amount (Liability)
Difference
Invest (FV - NI) $314,450 $318,200 ($3,750) 30% ($1,125)

c) Calculate the current income tax for the year ended December 31, 2017.
Accounting Income $302,000
Reversing difference: Unrealized gain on Investments (FV-NI) ($3,750)
Taxable Income 298,250
Current income taxes at 30% $89,475

d) Prepare the journal entries to record income taxes for 2017.


Debit Credit
Current Tax Expense 89,475
Income Tax Payable 89,475

Deferred Tax Expense 1,125


Deferred Tax Liability ($1,125 - Opening
1,125
balance of $0)

e) Prepare the income statement for 2017, beginning with the line “Income before income tax.”
Income before income tax $ 302,000
Income tax expense
Current $ 89,475
Deferred 1,125 90,600
Net Income $ 211,400

f) Provide the statement of financial position presentation for any resulting income tax statement of
financial position accounts at December 31, 2017. Be clear on the classification you have chosen and explain
your choice.
Current liabilities: Income tax payable $ 89,475
Non-current liabilities: Deferred tax liability $ 1,125

Under IFRS, all deferred tax assets and liabilities are reported as non-current items on a classified statement
of financial position.

g) Repeat part (f) assuming Henry follows the ASPE future/deferred income taxes method and has chosen
the fair value through net income model to account for its securities investments.

Current liabilities:
Income tax payable $ 89,475
Future tax liability 1,125

Current income taxes are due well within 12 months of the statement of financial position date, therefore,
they are classified as a current liability.

The classification for the future tax account must also be current since the temporary difference relates to
an asset that is classified as current on the statement of financial position. Under ASPE, future tax assets and
future tax liabilities are segregated into current and non-current categories, so Henry’s future tax liability
would be classified as current on a classified statement of financial position.
E18-12 (LO 2, 3, 5) One Reversing Difference, Future Taxable Amounts, One Rate, No Beginning Deferred
Taxes

Sorpon Corporation purchased equipment very late in 2017. Based on generous capital cost allowance rates provided
in the Income Tax Act, Sorpon Corporation claimed CCA on its 2017 tax return but did not record any depreciation
because the equipment had not yet been put into use. This temporary difference will reverse and cause taxable amounts
of $25,000 in 2018, $30,000 in 2019, and $40,000 in 2020. Sorpon’s accounting income for 2017 is $200,000 and the tax
rate is 30% for all years. There are no deferred tax accounts at the beginning of 2017.

Instructions:
a) Calculate the deferred tax balance at December 31, 2017.

(Taxable)
Statement of Fin. Deferred Tax
Tax Base Carrying Amount Temporary Tax Rate
Pos. Account (Liability)
Difference

Future Years
Total 2018 2019 2020

b) Calculate taxable income and income tax payable for 2017.

2017

c) Prepare the journal entries to record income taxes for 2017.


Debit
d) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before
income tax.”
eginning Deferred

e rates provided
epreciation
e taxable amounts
00,000 and the tax

Credit
“Income before
Solution: E18-12 (LO 2, 3, 5) One Reversing Difference, Future Taxable Amounts, One Rate, No Beginning
Deferred Taxes

Sorpon Corporation purchased equipment very late in 2017. Based on generous capital cost allowance rates provided
in the Income Tax Act, Sorpon Corporation claimed CCA on its 2017 tax return but did not record any depreciation
because the equipment had not yet been put into use. This temporary difference will reverse and cause taxable amounts
of $25,000 in 2018, $30,000 in 2019, and $40,000 in 2020. Sorpon’s accounting income for 2017 is $200,000 and the tax
rate is 30% for all years. There are no deferred tax accounts at the beginning of 2017.

Instructions:
a) Calculate the deferred tax balance at December 31, 2017.

(Taxable)
Statement of Fin. Deferred Tax
Tax Base* Carrying Amount Temporary Tax Rate
Pos. Account (Liability)
Difference
Equipment ($95,000) $0 ($95,000) 30% ($28,500)
Deferred tax liability, December 31, 2017 ($28,500)
Deferred tax liability before adjustment 0
Increase in deferred tax liability, and deferred tax expense for 2017 ($28,500)
* Values not provided in this exercise ($25,000 + $30,000 + $40,000 = $95,000)

Future Years
Total 2018 2019 2020
(Taxable) temporary differences
Depreciation in excess of CCA $95,000 $25,000 $30,000 $40,000
Tax rate enacted for the year 30% 30% 30%
Deferred tax liability $28,500 $7,500 $9,000 $12,000

b) Calculate taxable income and income tax payable for 2017.

2017
Accounting income $ 200,000
Permanent differences -
Reversing difference
CCA greater than depreciation 95,000
Taxable income 105,000
Current income taxes (30%) $ 31,500

c) Prepare the journal entries to record income taxes for 2017.


Debit
Current Tax Expense 31,500
Income Tax Payable

Deferred Tax Expense 28,500


Deferred Tax Liability
d) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before
income tax.”

Income before income tax $ 200,000


Income tax expense
Current $ 31,500
Deferred 28,500 60,000
Net Income $ 140,000
Rate, No Beginning

e rates provided
epreciation
e taxable amounts
00,000 and the tax

Credit

31,500

28,500
“Income before
P18-1
Anthony Ltd. began business on January 1, 2016. At December 31, 2016, it had a $4,500 balance in the Deferred
Tax Liability account that pertains to property, plant, and equipment acquired during 2016 at a cost of $900,000. The
property, plant, and equipment is being depreciated on a straight-line basis over six years for financial reporting
purposes, and is a Class 8—20% asset for tax purposes. Anthony’s income before income tax for 2017 was $60,000.
Anthony Ltd. follows IFRS and the half-year convention for depreciation.
The following items caused the only differences between accounting income before income tax and taxable income
in 2017.

1. In 2017, the company paid $56,250 for rent; of this amount, $18,750 was expensed in 2017. The other $37,500 will
be expensed equally over the 2018 and 2019 accounting periods. The full $56,250 was deducted for tax purposes in
2017.
2. Anthony Ltd. pays $9,000 a year for a membership in a local golf club for the company’s president.
3. Anthony Ltd. now offers a one-year warranty on all its merchandise sold. Warranty expenses for 2017 were $9,000.
Cash payments in 2017 for warranty repairs were $4,500.
4. Meals and entertainment expenses (only 50% of which are ever tax deductible) were $12,000 for 2017.
5. The maximum allowable CCA was taken in 2017. There were no asset disposals for 2017.

Instructions:
a) Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2017.

(A) CCA (B) A-B C


Year Base Rate CA UCC Depreciation

Statement of Deductible Deferred Tax


Financial Position Carrying (Taxable) Tax Rate (see
Tax Base Asset
Account Dec. 31, Amount Temporary below) (Liability)
2017 Differences

b) Calculate income tax payable for 2017.


c) Prepare the journal entries to record income taxes for 2017.
Debit

d) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before
income tax.”

e) Indicate how deferred taxes should be presented on the December 31, 2017 statement of financial position.
Statement of financial position, December 31, 2017

f) How would your response to parts (a) to (e) change if Anthony reported under ASPE?

Statement of financial position, December 31, 2017


alance in the Deferred
a cost of $900,000. The
r financial reporting
ax for 2017 was $60,000.

tax and taxable income

17. The other $37,500 will


ucted for tax purposes in

president.
ses for 2017 were $9,000.

,000 for 2017.


.

mber 31, 2017.

(Taxable) C-B
Carrying Temporary Reversing
Amount Difference Difference

For (f) ASPE


Current of
Long-Term
Credit

th the line “Income before

f financial position.
Solution: P18-1
Anthony Ltd. began business on January 1, 2016. At December 31, 2016, it had a $4,500 balance in the Deferred
Tax Liability account that pertains to property, plant, and equipment acquired during 2016 at a cost of $900,000. The
property, plant, and equipment is being depreciated on a straight-line basis over six years for financial reporting
purposes, and is a Class 8—20% asset for tax purposes. Anthony’s income before income tax for 2017 was $60,000.
Anthony Ltd. follows IFRS and the half-year convention for depreciation.
The following items caused the only differences between accounting income before income tax and taxable income
in 2017.

1. In 2017, the company paid $56,250 for rent; of this amount, $18,750 was expensed in 2017. The other $37,500 will
be expensed equally over the 2018 and 2019 accounting periods. The full $56,250 was deducted for tax purposes in
2017.
2. Anthony Ltd. pays $9,000 a year for a membership in a local golf club for the company’s president.
3. Anthony Ltd. now offers a one-year warranty on all its merchandise sold. Warranty expenses for 2017 were $9,000.
Cash payments in 2017 for warranty repairs were $4,500.
4. Meals and entertainment expenses (only 50% of which are ever tax deductible) were $12,000 for 2017.
5. The maximum allowable CCA was taken in 2017. There were no asset disposals for 2017.

Instructions:
a) Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2017.

(A) CCA (B) A-B C


Year Base Rate CA UCC Depreciation
2016 $ 900,000 10% 90,000 810,000 75,000
2017 810,000 20% 162,000 648,000 150,000
2018 648,000 20% 129,600 518,400 150,000
2019 518,400 20% 103,680 414,720 150,000
2020 414,720 20% 82,944 331,776 150,000

Statement of Deductible Deferred Tax


Financial Position Carrying (Taxable) Tax Rate (see
Tax Base Asset
Account Dec. 31, Amount Temporary below) (Liability)
2017 Differences

Property, Plant &


Equip. $648,000* $675,000** ($27,000) 30% ($8,100)
Prepaid rent (2018
expense) 0 18,750 (18,750) 30% (5,625)
Prepaid rent (2019
expense) 0 18,750 (18,750) 30% (5,625)
Warranty liability
0 (4,500) 4,500 30% 1,350
Deferred tax liability, December 31, 2017 (18,000)
Deferred tax liability before adjustment (4,500)
Incr. in deferred tax liability, and deferred tax expense for 2017 ($13,500)
b) Calculate income tax payable for 2017.
Accounting Income $ 60,000
Permanent differences:
50% of meals expense ($12,000 x50%) $ 6,000
Golf club fees 9,000 15,000
75,000
Reversing differences:
Depreciation 150,000
Capital cost allowance (162,000) (12,000)
Rent paid (56,250)
Rent expense 18,750 (37,500)
Warranty expense 9,000
Warranty payments (4,500) 4,500
Taxable income $30,000
Current income taxes - 30% $9,000

c) Prepare the journal entries to record income taxes for 2017.


Debit
Current Tax Expense 9,000
Income Tax Payable

Deferred Tax Expense 13,500


Deferred Tax Liability

d) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before
income tax.”

Income before income tax $ 60,000


Income tax expense
Current $ 9,000
Deferred 13,500 22,500
Net Income $ 37,500

e) Indicate how deferred taxes should be presented on the December 31, 2017 statement of financial position.
Statement of financial position, December 31, 2017
Non-current liabilities: Deferred tax liability ($13,725 + $4,275 below) $ 18,000

IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of
financial position.

f) How would your response to parts (a) to (e) change if Anthony reported under ASPE?
If Anthony reported under ASPE, the only difference would be in how any future tax asset or liability would be
reported on the statement of financial position.
Statement of financial position, December 31, 2017
Current liabilities: Future tax liability: ($5,625 - $1,350) $ 4,275
Non-current liabilities: Future tax liability ($5,625 + $8,100) 13,725

Under ASPE, 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.
alance in the Deferred
a cost of $900,000. The
r financial reporting
ax for 2017 was $60,000.

tax and taxable income

17. The other $37,500 will


ucted for tax purposes in

president.
ses for 2017 were $9,000.

,000 for 2017.


.

mber 31, 2017.

(Taxable) C-B
Carrying Temporary Reversing
Amount Difference Difference
825,000 ($15,000) ($15,000)
675,000 (27,000) (12,000)
525,000 (6,600) 20,400
375,000 39,720 46,320
225,000 106,776 67,056

For (f) ASPE


Current of
Long-Term

LT

LT

C
Credit

9,000

13,500

th the line “Income before

f financial position.

a classified statement of

r liability would be
current categories. The
ined by the classification of