DEFERRED TAXES

YEAR 1 YEAR 2 YEAR 3 YEAR 4

Accounting income $4,000,000 $4,800,000 $5,200,000 $6,000,000

Depreciation 300,000 500,000 700,000 800,000

Capital cost allowance 450,000 620,000 680,000 730,000
Penalties 20,000 16,000
Entertainment 40,000 70,000 80,000
Severance* 300,000
Warranty accrual 60,000 80,000 120,000
Warranty expenditure 20,000 60,000 90,000
Tax rate 40% 40% 42% 46%

*payable in equal amount in year 3, 4 and 5

REQUIRED
Prepare the bottom portion of the Statement of Income beginning with “Income before
income taxes”.

Year 1
Accounting Income 4,000,000
Depreciation 300,000
Capital Cost Allowance (450,000)
Income before income Tax 3,850,000
Tax rate 40%
Current taxes 1,540,000

Income Tax expense 1540000

Income Tax payable 1540000

Timing Differences
1. NBV/UCC Depreciation CCA Difference TR Account Balance
Year 1 300,000 450,000 (150,000) 0.40 (60000) DTL

Deferred tax expense 60000

Deferred tax liability 60000

Income Statement 1 2 3 4
Income before taxes 4,000,000
Income Taxes
Current 1540000
Deferred 60000
 1,600,000

2,400,000

Year 2
Accounting Income 4,800,000
Depreciation 500,000
Capital Cost Allowance (620,000)
Penalties 20,000
Entertainment 20,000 only 50% deductible
Warranty accrual 60,000
Warranty expenditure (20,000)
Income before income Tax 4,760,000
Tax rate 40%
Current taxes 1,904,000

Income tax expense 1,904,000

Income Tax payable 1,904,000

Timing Differences

1.NBV/UCC Depreciation CCA TD TR Acct bal

Year 1 300,000 450,000 (150,000) 0.4 (60000)DTL

Year 2 500,000 620,000 (48,000)

800,000 1,070,000 (270,000) 0.4 (108,000)DTL

Deferred tax expense 48,000

Deferred tax liability 48,000

2. Warranty

Year 2 60000
(20000)

40000 0.4 16,000 DTA

Deferred Tax asset 16,000

Deferred tax expense 16,000

Income Statement 1 2 3 4
Income before taxes 4,000,000 4,800,000
Income Taxes
Current 1540000 1,904,000
 Deferred 60000 32,000

1,600,000 1,936,000

2,400,000 2,864,000

Year 3
Accounting Income 5,200,000
Depreciation 700,000
Capital Cost Allowance (680,000)
Penalties 16,000
Entertainment 35,000 only 50% deductible
Severance accounting 300,000
Severance Tax (100,000) 1/3 in the year
Warranty accrual 80,000
Warranty expenditure (60,000)
Income before income Tax 5,491,000
Tax rate 42%
Current taxes 2,306,220

Income Tax Expense 2,306,220

Income Tax payable 2,306,220

Timing Differences

1.NBV/UCC Depreciation CCA TD TR Acct bal

Year 1 300,000 450,000 (150,000) 0.4 (60000)DTL

Year 2 500,000 620,000 (48,000)

800,000 1,070,000 (270,000) 0.40 (108000)DTL

Year 3 700,000 680,000 3000

1,500,000 1,750,000 (250,000) 0.42 (105,000)

Deferred tax liability 3,000

Deferred tax expense 3,000

2. Warranty

Year 2 60000
(20000)

40000 0.4 16,000 DTA

 80000 9200
(60000)

60000 0.42 25200 DTA

Deferred tax asset 9200

Deferred tax expense 9200

3. Severance 200,000 0.42 84,000 DTA

Deferred tax asset 84000

Deferred tax expense 84000