Deck 6: Income Taxes

Question 1

Alabama Corp.'s taxable income differed from its accounting income for 2020. An item that would create a permanent difference in accounting and taxable incomes for the corporation would be

A) a balance in the Unearned Rent account at year end.
B) using CCA for tax purposes and straight-line depreciation for book purposes.
C) a payment of the golf club dues for the president's membership.
D) making instalment sales during the year.

Answer 1

C

Question 2

Macintyre Inc. sells household furniture on an instalment basis. Customers make payments in equal monthly instalments over a two-year period, with no down payment required. Macintyre's gross profit on instalment sales is 40% of the selling price. For book purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the instalment method is used. There are no other accounting and income tax accounting differences, and Macintyre's income tax rate is 30%.
If Macintyre's December 31, 2020, SFP includes a deferred tax liability of $ 90,000 arising from the difference between accounting and tax treatment of the instalment sales, it should also include instalment accounts receivable of

A) $ 750,000.
B) $ 300,000.
C) $ 225,000.
D) $ 90,000.

Answer 2

A

Question 3

At the end of 2020, its first year of operations, Kali Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $\begin{array}{lr}\text { Pre-tax accounting income } & \$ 800,000 \\\text { Estimated lawsuit expense } & 400,000 \\\text { Excess CCA for tax purposes } & \underline{(900,000)} \\\text { Taxable income } & \$ 300,000\end{array}$ The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Kali adheres to IFRS requirements. The current income tax payable is

A) $ 0.
B) $ 75,000.
C) $ 150,000.
D) $ 200,000.

Answer 3

B

Question 4

For calendar 2020, Peanuts Corp. prepared the following reconciliation of accounting income to taxable income: $\begin{array}{lr}\text { Pre-tax accounting income } & \$ 750,000 \\\text { Addreversible difference } & \\\quad \text { Construction contract revenue which will reverse in } 2021 & 100,000 \\\text { Deduct reversible difference } & \\\quad \text { Depreciation expense, which will reverse in equal amounts in } & \\\quad \text { each of the next four years } & \underline{(400,000)} \\\text { Taxable income } & \$ 450,000\end{array}$ Peanut's income tax rate is 25% for 2020. What amount should the corporation report in its 2020 income statement as current income tax expense?

A) $ 25,000
B) $ 112,500
C) $ 187,500
D) $ 212,500

Question 5

Under IFRS, end of the period adjustments may need to be made to income for all of the following reasons EXCEPT

A) income taxes must be filed in accordance with the Income Tax Act.
B) IFRS does not provide guidance on allowable deductions for CRA.
C) IFRS does allow for the taxes payable approach.
D) income taxes preparation may also be subject to provincial legislation.

Question 6

Bare Fashions Corp. reported pre-tax accounting income of $ 300,000 for calendar 2020. To calculate the income tax liability, the following data were considered: $\begin{array}{lr}\text { Life insur ance proceeds on the death of the CEO } & \$ 130,000 \\\text { CCA in excess of depreciation } & 20,000 \\\text { Instalment tax payments made dur ing } 2020 & 25,000 \\\text { Enacted income tax rate for } 2020 & 30 \%\end{array}$ What amount should Bare Fashion report as its current income tax liability on its December 31, 2020 SFP?

A) $ 20,000
B) $ 26,000
C) $ 45,000
D) $ 51,000

Question 7

Casey Inc. uses the accrual method of accounting for financial reporting purposes and the instalment method of accounting for income tax purposes. Instalment income of $ 930,000 will be collected in the following years when the enacted tax rates are: $$\begin{array} { c c c } & \text { Collection of Income } & \text { Enacted Tax Rates } \\ 2020 & \$ 120,000 & 35 \% \\2021 & 180,000 & 30 \% \\2022 & 270,000 & 30 \% \\2023 & 360,000 & 25 \%\end{array}$$ The instalment income is Casey's only reversible difference. What amount should be included as the deferred tax liability on their December 31, 2020 SFP?

A) $ 225,000
B) $ 243,000
C) $ 256,500
D) $ 315,000

Question 8

For calculating income tax expense, IFRS requires the use of

A) any method as long as the CRA approves it.
B) the taxes payable method only.
C) the temporary difference approach only.
D) either the taxes payable method or the temporary difference approach.

Question 9

Shierling Corp. reported pre-tax accounting income of $ 750,000 for calendar 2020. To calculate the income tax liability, the following data were considered: $\begin{array}{lr}\text { Non-taxable portion of capital gains } & \$ 30,000 \\\text { CCA in excess of depreciation } & 60,000 \\\text { Instalment tax payments made dur ing } 2020 & 150,000 \\\text { Enacted income tax rate for } 2020 & 30 \%\end{array}$ What amount should Shierling report as its current income tax liability on its December 31, 2020 SFP?

A) $ 198,000
B) $ 75,000
C) $ 66,000
D) $ 48,000

Question 10

For calendar 2020, its first year of operations, Lion Ltd. reported pre-tax accounting income of $ 100,000. Lion uses CCA for tax purposes and straight-line depreciation for financial reporting. The differences between depreciation and CCA over the five-year life of their assets, and the enacted tax rates for 2020 to 2024 are as follows: $$\begin{array}{l}\begin{array} { c c c } &\text { Depreciation }\\& \text { Over (Under) CCA } & \text { Tax Rates } \\2020 & \$ ( 20,000 ) & 35 \% \\2021 & ( 26,000 ) & 30 \% \\2022 & ( 6,000 ) & 30 \% \\2023 & 24,000 & 30 \% \\2024 & 28,000 & 30 \%\end{array}\end{array}$$ There are no other reversible differences. On Lion's December 31, 2020 SFP, the deferred tax liability and the current income taxes payable should be Deferred Current Income $\begin{array}{lcc} & \text { \underline{\text{ Tax Liability }} } & \text { \underline{\text{ Taxes Payable }} } \\\text { A) } & \$ 7,000 & \$ 28,000 \\\text { B) } & \$ 15,600 & \$ 28,000 \\\text { C } & \$ 6,000 & \$ 28,000 \\\text { D) } & \$ 6,000 & \$ 24,000\end{array}$

Question 11

When calculating income tax expense, taxable income of a corporation differs from pre-tax accounting income because of $\begin{array}{cc}\text { Permanent } & \text { Reversible } \\\text { Differences } & \text { Differences } \\\text { A) no } & \text { no } \\\text { B) no } & \text { yes } \\\text { C) yes } & \text { yes } \\\text { D) yes } & \text { no }\end{array}$

Question 12

The tax base of a liability is its carrying amount on the SFP

A) reduced by any amount that will be deductible for tax purposes in future periods.
B) increased by any amount that will be deductible for tax purposes in future periods.
C) less any amount that will not be taxable in the future.
D) plus any amount that will not be taxable in the future.

Question 13

Columbia Corp.'s partial income statement for its first year of operations is as follows: $\begin{array}{lrr}\text { Income before income taxes } & & \$ 1,750,000 \\\text { Income tax expense } & & \\\quad \text { Current } & \$ 483,000 & \\\quad \text { Deferred } & \underline{42,000} & \underline{525,000} \\\text { Net income } & & \$ 1,225,000\end{array}$ Columbia uses straight-line depreciation for financial reporting purposes and CCA for tax purposes. The depreciation expense for the year was $ 700,000. Except for depreciation, there were no other differences between accounting income and taxable income. Assuming a 30% tax rate, what amount was claimed for CCA on the corporation's tax return for the year?

A) $ 560,000
B) $ 665,000
C) $ 700,000
D) $ 840,000

Question 14

In regard to reconciling income reported on the financial statements to taxable income, which of the following statements is INCORRECT?

A) All differences between accounting income and taxable income are considered.
B) Only reversible differences are considered.
C) Only those that result in temporary differences are considered when determining deferred tax amounts for the SFP.
D) Permanent differences may be added back to or deducted from accounting income.

Question 15

For calculating income tax expense, ASPE allows the use of

A) any method as long as the CRA approves it.
B) the taxes payable method only.
C) the future income taxes method only.
D) either the taxes payable method or the future income taxes method.

Question 16

Under IFRS, accounting income and taxable income are referred to as $$\begin{array} { l c c } & \text { \underline{\text{ Accounting Income }} } & \text { \underline{\text{ Taxable Income}} } \\ \text { A) } & Accounting profit& \text { Income for tax purposes } \\\text { B) }& \text { Ancomnting profit } & \text { Taxable profit } \\\text { C) } & \text { Income before taxes } & \text { Taxable profit } \\\text { D) } & \text { Pre-tax profit } & \text { Taxable income }\end{array}$$

Question 17

Which of the following will NOT result in a reversible difference?

A) product warranty liabilities
B) unrealized holding losses
C) instalment sales
D) fines and penalties

Question 18

The difference between the tax base of an asset or liability and its reported amount on the SFP is called a

A) permanent difference.
B) temporary difference.
C) current difference.
D) future income tax expense.

Question 19

On January 1, 2020, Wings Inc. purchased a machine for $ 270,000, which will be depreciated $ 27,000 annually for book purposes. For income tax reporting, the asset is a Class 8 asset with a CCA rate of 20%, subject to the half year rule for 2020. Assume a present and future enacted income tax rate of 30%. What amount should be added to Wings' deferred tax liability for the difference between depreciation and CCA at December 31, 2020?

A) $ 16,200
B) $ 9,000
C) $ 8,100
D) $ 0

Question 20

Of the various taxation options available to OECD countries, those that had the most negative impact on gross domestic product were

A) property taxes.
B) consumption taxes.
C) corporate taxes.
D) personal income taxes.

Question 21

In 2020, Savoury Ltd. accrued, for book purposes, estimated losses on disposal of unused plant facilities of $ 750,000. The facilities were sold in March 2021 and a $ 750,000 loss was recognized for tax purposes. Also, in 2020, Savoury paid $ 50,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 25% in both 2020 and 2021, and that Savoury paid $ 390,000 in income taxes in 2020, the amount reported as the deferred tax asset or liability on Savoury's SFP at December 31, 2020, should be a

A) Cannot be determined from the information given.
B) $ 175,000 asset.
C) $ 187,500 liability.
D) $ 187,500 asset.

Question 22

At the end of 2020, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } \text { Pre-tax account ing income } & \$ 300,000 \\\text { Estimated lawsuit expense } & 750,000 \\\text { Instalment sales } & ( 600,000 ) \\\text { Taxable income } & \$ 450,000\end{array}$$ The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax liability to be recorded is

A) $ 180,000.
B) $ 90,000.
C) $ 67,500.
D) $ 45,000.

Question 23

For calendar 2020, Melvin Corp. reported depreciation expense of $ 800,000 on its income statement, but on its 2020 income tax return, Melvin claimed CCA of $ 1,200,000. The 2020 income statement also included $ 150,000 in accrued warranty expense that will be deducted for tax purposes when paid. Melvin's income tax rates are 30% for 2020 and 2021, and 24% for 2022 and 2023. The depreciation difference and warranty expense will reverse over the next three years as follows: $\begin{array}{cccc} & \text { \underline{\text{ Depreciation Difference }}} & & \text { \underline{\text{ Warranty Expense }} } \\2021 & \$ 160,000 & & \$ 30,000 \\2022 & 140,000 & & 50,000 \\2023 & \underline{100,000} & & \underline{\text{ 70,000}} \\& \$ 400,000 & & \$ 150,000\end{array}$ These were Melvin's only reversible differences. At December 31, 2020, Melvin's deferred tax liability should be

A) $ 67,800.
B) $ 73,200.
C) $ 75,000.
D) $ 133,800.

Question 24

If a corporation prepares an adjusting entry to credit the deferred tax asset account, this should represent

A) additional future income taxes payable.
B) a transfer to the deferred tax liability account.
C) the reversal of a deferred tax benefit that originated in a prior year.
D) the reversal of a deferred tax expense that originated in a prior year.

Question 25

At the end of 2020, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } \text { Pre-tax account ing income } & \$ 300,000 \\\text { Estimated lawsuit expense } & 750,000 \\\text { Instalment sales } & ( 600,000 ) \\\text { Taxable income } & \$ 450,000\end{array}$$ The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The total income tax expense to be reported on the income statement is

A) $ 90,000.
B) $ 135,000.
C) $ 150,000.
D) $ 300,000.

Question 26

A corporation records an unrealized loss on FV-NI investments. This would result in what type of difference and in what type of deferred tax account? $\begin{array}{lccc} & \text { \underline{\text{ Type of Difference }} } & & \text { \underline{\text{ Deferred tax }} } \\\text { A) } & \text { Reversible } & & \text { Liability } \\\text { B) } & \text { Reversible } & & \text { Asset } \\\text { C) } & \text { Permanent } & & \text { Liability } \\\text { D) } & \text { Permanent } & & \text { Asset }\end{array}$

Question 27

One objective of interperiod tax allocation is to

A) recognize the tax effects in the accounting period when the transactions and events are recognized for financial reporting purposes.
B) recognize a distribution of earnings to the shareholders.
C) reconcile the tax consequences of permanent and reversible differences appearing on the current year's financial statements.
D) adjust income tax expense on the income statement to be in agreement with income taxes payable on the SFP.

Question 28

A deferred tax asset is the

A) current tax consequence of a taxable temporary difference.
B) current tax consequence of a deductible temporary difference.
C) future tax consequence of a deductible temporary difference.
D) future tax consequence of a taxable temporary difference.

Question 29

Gretna Corp. reported the following results for calendar 2020, its first year of operations: $\begin{array}{lr}\text { Pre-tax account ing income } & \$ 250,000 \\\text { Taxable income } & 400,000\end{array}$ The difference between accounting income and taxable income is due to a temporary difference, which will reverse in 2021. Assuming that the enacted tax rates in effect are 30% in 2020 and 25% in 2021, what amount should Gretna record as the deferred tax asset or liability for calendar 2020?

A) $ 45,000 deferred tax liability
B) $ 37,500 deferred tax asset
C) $ 45,000 deferred tax asset
D) $ 37,500 deferred tax liability

Question 30

A reconciliation of Quebec Corp.'s pre-tax accounting income with its taxable income for 2020, its first year of operations, is as follows: $\begin{array}{lr}\text { Pre-tax account ing income } & \$ 3,000,000 \\\text { Excess CCA } & (90,000) \\\text { Taxable income } & \$ 2,910,000\end{array}$ The excess CCA will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2020, 35% in 2021, and 30% in both 2022 and 2023. The total deferred tax liability to be reported on Quebec's SFP at December 31, 2020 is

A) $ 36,000.
B) $ 31,500.
C) $ 30,000.
D) $ 28,500.

Question 31

At the end of 2020, its first year of operations, Rinaldo Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } \text { Pre-tax account ing income } & \$ 300,000 \\\text { Estimated lawsuit expense } & 750,000 \\\text { Instalment sales } & ( 600,000 ) \\\text { Taxable income } & \$ 450,000\end{array}$$ The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax asset to be recorded is

A) $ 0.
B) $ 45,000.
C) $ 90,000.
D) $ 225,000.

Question 32

In its 2020 income statement, its first year of operations, Penelope Corp. reported depreciation of $ 525,000 and interest revenue from a Canadian corporation of $ 105,000. For 2020 income tax purposes, Maine claimed CCA of $ 825,000. The difference in depreciation/CCA will reverse in equal amounts over the next three years. Penelope's income tax rates are 35% for 2020, 30% for 2021, and 25% for both 2022 and 2023. What amount should be included as the deferred tax liability on Penelope's December 31, 2020 SFP?

A) $ 99,000
B) $ 90,000
C) $ 80,000
D) $ 75,000

Question 33

On January 1, 2020, Lake Corp., a publicly accountable enterprise, purchased 40% of the common shares of Michigan Inc. and accounts for this investment by the equity method. During 2020, Michigan reported earnings of $ 900,000 and paid dividends of $ 300,000. Lake assumes that all of Michigan's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 20%. Lake's current income tax rate is 25%. The increase in Lake's deferred tax liability for this temporary difference is

A) $ 120,000.
B) $ 100,000.
C) $ 60,000.
D) $ 48,000.

Question 34

On January 2, 2019, Brunswick Corp. purchased a depreciable asset for $ 600,000. The asset has an estimated 4-year life with no residual value. Straight-line depreciation is being used for financial statement purposes but the following CCA amounts will be deducted for tax purposes: $\begin{array}{rrrr}2019 & \$ 150,000 &&& 2022 & \$ 56,250 \\2020 & 225,000 &&& 2023 & 28,125 \\2021 & 112,500 &&& 2024 & 28,125\end{array}$ Assuming an income tax rate of 30% for all years, the deferred tax liability that should be reflected on Brunswick's SFP at December 31, 2020, should be

A) $ 22,500.
B) $ 33,750.
C) $ 45,000.
D) $ 50,625.

Question 35

At the end of 2020, its first year of operations, Halifax Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } \text { Pre-tax account ing income } & \$ 800,000 \\\text { Estimated lawsuit expense } & 400,000 \\\text { Excess CCA for tax purposes } & ( 900,000 ) \\\text { Taxable income } & \$ 300,000\end{array}$$ The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Halifax adheres to IFRS requirements. The deferred tax liability to be recorded is

A) $ 225,000.
B) $ 200,000.
C) $ 100,000.
D) $ 0.

Question 36

For calendar 2020, its first year of operations, Snow Corp. reported pre-tax accounting income of $ 330,000 and taxable income of $ 600,000. The only reversible difference is accrued warranty costs, which are expected to be paid as follows: $$\begin{array} { l r } 2021 & \$ 90,000 \\2022 & 45,000 \\2023 & 45,000 \\2024 & 90,000\end{array}$$ The enacted income tax rates are 35% for 2020, 30% for 2021, 2022 and 2023, and 25% for 2024. The deferred tax asset reported on Snow's December 31, 2020 SFP should be

A) $ 54,000.
B) $ 63,000.
C) $ 76,500.
D) $ 94,500.

Question 37

Total income tax expense for a corporation consists of

A) current tax expense and deferred tax expense.
B) current tax expense only.
C) deferred tax expense only.
D) The deferred tax asset minus any deferred tax liability.

Question 38

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in $\begin{array}{ccc} & \begin{array}{c}\text { Taxable Temporary } \\\text { \underline{\text{ Differences }} }\end{array} & \begin{array}{c}\text { Deductible Temporary } \\\text { \underline{\text{ Differences }} }\end{array} \\\text { A) } & \text { yes } & \text { yes } \\\text { B) } & \text { yes } & \text { no } \\\text { C) } & \text { no } & \text { yes } \\\text { D) } & \text { no } & \text { no }\end{array}$

Question 39

At the end of 2020, its first year of operations, Gaucho Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: $$\begin{array} { l r } \text { Pre-tax account ing income } & \$ 800,000 \\\text { Estimated lawsuit expense } & 400,000 \\\text { Excess CCA for tax purposes } & ( 900,000 ) \\\text { Taxable income } & \$ 300,000\end{array}$$ The estimated lawsuit expense of $ 400,000 will be deductible in 2021 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $ 300,000 in each of the next three years. The income tax rate is 25% for all years. Gaucho adheres to IFRS requirements. The deferred tax asset to be recorded is

A) $ 200,000.
B) $ 160,000.
C) $ 100,000.
D) $ 60,000.

Question 40

A deferred tax liability is the

A) current tax consequence of a taxable temporary difference.
B) current tax consequence of a deductible temporary difference.
C) future tax consequence of a deductible temporary difference.
D) future tax consequence of a taxable temporary difference.

Question 41

Allocating income tax expense or benefit for the period (both current and deferred) to the income and other statements to reflect transactions that attract income tax is known as

A) intraperiod tax allocation.
B) interperiod tax allocation.
C) current tax allocation.
D) reconcilation approach.

Question 42

Hopper Corporation reported the following results for its first three years of operations: $$\begin{array} { l r } 2019 \text { income (before income taxes) } & \$ 40,000 \\2020 \text { loss (before income taxes) } & ( 360,000 ) \\2021 \text { income (before income taxes) } & 400,000\end{array}$$ There were no permanent or reversible differences during these three years. Assume an income tax rate of 30% for 2019 and 2020, and 40% for 2021, and that any deferred tax asset recognized is more likely than not to be realized. If Hopper elects to use the carryback provisions, what income (loss) is reported for 2020?

A) $ (360,000)
B) $ (348,000)
C) $ (220,000)
D) $ 0

Question 43

Under IFRS, how are deferred tax asset and liability accounts presented on the SFP?

A) They must be segregated into current and non-current items.
B) They must be shown as non-current assets or liabilities.
C) They must be shown as current assets or liabilities.
D) They must be reported as a reduction of the related asset or liability accounts.

Question 44

Colombe Properties Corporation reported the following results for its first three years of operations: $$\begin{array} { l r } 2019 \text { income (before income taxes) } & \$ 40,000 \\2020 \text { loss (before income taxes) } & ( 360,000 ) \\2021 \text { income (before income taxes) } & 400,000\end{array}$$ There were no permanent or reversible differences during these three years. Assume an income tax rate of 30% for 2019 and 2020, and 40% for 2021, and that any deferred tax asset recognized is more likely than not to be realized. If Colombe Properties elects to use the carryforward provisions and not the carryback provisions, what income (loss) is reported for 2020?

A) $ 0
B) $ (216,000)
C) $ (232,000)
D) $ (360,000)

Question 45

Recognition of tax benefits in a loss year due to a loss carryforward requires

A) the establishment of a deferred tax liability.
B) the establishment of a deferred tax asset.
C) the establishment of an income tax receivable.
D) only a note to the financial statements.

Question 46

Temporary differences
Explain the difference between a taxable temporary difference and a deductible temporary difference.

Question 47

Calculation of taxable income
The records for Kalman Inc. show the following data for calendar 2020:
1. Gross profit on instalment sales recorded on the books was $ 100,000. Gross profit from collections of instalment receivables was $ 50,000.
2. Golf club dues were $ 3,800.
3. Machinery was acquired in January 2020 for $ 300,000. Kalman uses straight-line depreciation over a ten-year life (no residual value). For tax purposes, Kalman uses CCA at 14% for 2020 after considering the half-year rule.
4. Dividends received from a Canadian corporation were $ 4,000.
5. The estimated warranty liability related to 2020 sales was $ 19,600. Warranty repair costs paid during 2020 were $ 13,600. The remainder will be paid in 2021.
6. Pre-tax accounting income is $ 250,000. The enacted income tax rate is 25%.
Instructions
a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income.
b) Prepare the required adjusting journal entries to record income taxes for 2020.

Question 48

Permanent and reversible differences
Explain whether each of the following independent situations should be treated as a reversible difference or a permanent difference.
1. For accounting purposes, Barley Corp. reports revenue from instalment sales on the accrual basis. For income tax purposes it reports the revenues by the instalment method, deferring recognition of gross profit until cash is collected.
2. Pre-tax accounting income and taxable income differ because dividends received from Canadian corporations were not included in Rye Corp.'s taxable income, while 100% of the dividends received were included as revenue for financial statement purposes.
3. Flax Corp.'s estimated warranty costs (covering a three-year period) are expensed for accounting purposes at the time of sale, but deducted for income tax purposes only when paid.

Question 49

Tax rates other than the current tax rate may be used to calculate the future income tax amount on the SFP if

A) it is probable that a future income tax rate change will occur.
B) it appears likely that a future income tax rate will be higher than the current tax rate.
C) the future income tax rates have been enacted or substantively enacted into law.
D) it appears likely that a future income tax rate will be less than the current tax rate.

Question 50

Taxable income of a corporation

A) differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.
B) differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
C) is based on generally accepted accounting principles.
D) is reported on the corporation's income statement.

Question 51

Saucy Inc. reported a taxable and accounting loss of $ 130,000 for 2020. Its pre-tax accounting income for the last two years was as follows: $$\begin{array} { r r } 2018 & \$ 60,000 \\2019 & 80,000\end{array}$$ The amount that Saucy reports as a net loss for financial reporting purposes in 2020, assuming that it uses the carryback provisions, and that the tax rate is 25% for all years involved, is

A) $ 0.
B) $ 97,500.
C) $ 105,000.
D) $ 130,000.

Question 52

Permanent and reversible differences
Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or reversible differences. For reversible differences, indicate whether they will create deferred tax assets or deferred tax liabilities.
1. Investments accounted for by the equity method (investment income exceeds dividends received)
2. Advance rental receipts
3. Membership costs for executives at a local golf club
4. Estimated future warranty costs
5. Excess of pension contributions over pension expense
6. Expenses incurred in obtaining tax-exempt revenue
7. Instalment sales
8. Excess CCA over accounting depreciation
9. Long-term construction contracts
10. Premiums paid on life insurance of officers (company is the beneficiary)
11. Penalty assessed by CRA for late submission of income tax return

Question 53

McMurray Inc. incurred an accounting and taxable loss for 2020. The corporation therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2020 financial statements?

A) The reduction of the loss should be reported as an adjustment to retained earnings.
B) The refund claimed should be reported as a future charge and amortized over five years.
C) The refund claimed should be reported as revenue in the current year.
D) The refund claimed should be shown as a reduction of the loss in 2020.

Question 54

Future income taxes
Pan Corp., at the end of 2020, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: $\begin{array}{lr}\text { Pre-tax account ing income } & \$ 300,000 \\\text { Estimated warranty expenses deductible when paid } & 800,000 \\\text { Excess CCA } & (600,000) \\\text { Taxable income } & \$ 500,000\end{array}$ Estimated warranty expenses of $ 530,000 will be deductible in 2021, $ 200,000 in 2022, and $ 70,000 in 2023. The use of the depreciable assets will result in taxable amounts of $ 200,000 in each of the next three years.
The enacted tax rate is 30% and is not expected to change.
Instructions
a) Prepare a schedule of the future taxable and deductible amounts.
b) Prepare the required adjusting journal entries to record income taxes for 2020.

Question 55

Night Owl Inc. reports a taxable and pre-tax accounting loss of $ 150,000 for 2020. The corporation's taxable and pre-tax accounting income and tax rates for the last two years were: $$\begin{array} { r r r } 2018 & \$ 200,000 & 20 \% \\2019 & 200,000 & 25 \%\end{array}$$ The 2020 tax rate is 30%. If Indiana elects to use the carryback provisions, the amount that should be reported as income tax receivable for 2020 is

A) $ 50,000.
B) $ 45,000.
C) $ 35,000.
D) $ 30,000.

Question 56

The use of a Deferred Tax Asset account is subject to all of the following restrictions, EXCEPT

A) if the future taxable income is not probable, the deferred tax asset account will be removed.
B) the deferred tax asset account is regularly reviewed.
C) when conditions change a previously unrecognized deferred tax asset account may be recognized.
D) the allowance method for recognizing the deferred tax asset account is the required standard.

Question 57

Using IFRS, IAS 12 guidelines allow for all of the following EXCEPT
a) the choice of using either the taxes payable method or the future income taxes method.
b) the use of the temporary difference approach.
c) it does not use a valuation account.
d) it permits the use of a deferred tax asset account to the extent that it is probable that it will be realized.

Question 58

The effective tax rate for a period is calculated by dividing

A) total income tax expense by taxable income.
B) total income tax expense by the pre-tax income on the income statement.
C) taxable income by total income tax expense.
D) taxable income by the pre-tax income on the income statement.

Question 59

Interperiod tax allocation causes

A) the income tax expense reported on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.
B) the income tax expense reported on the income statement to bear a normal relation to the tax liability.
C) the income tax liability reported on the SFP to bear a normal relation to the income before tax reported on the income statement.
D) the income tax expense reported on the income statement to be presented with the specific revenues causing the tax.

Question 60

Recognizing a deferred tax asset for most deductible temporary differences and carryforward of unused tax losses is

A) used under IFRS only.
B) used under ASPE only.
C) used only to the extent that it is probable and the deferred tax asset will be realized.
D) used only for corporate income tax purposes for CRA.

Question 61

Taxes payable method and disclosure
Gursol Exchange Inc., is arriving at the financial statement disclosures for the 2020 financial statement note on income taxes. The company uses ASPE, and follows the taxes payable method. The statutory tax rate is currently 25%. During 2020, income before tax was $ 170,000. CCA exceeded depreciation expense by $ 45,000. Gursol paid interest on late and deficient tax instalments of $ 18,000 during 2020.
Instructions
a) Determine the income tax expense to be recorded using the taxes payable method and record the necessary journal entry.
b) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place.

Question 62

Deferred Tax Asset and tax law
Identify the various possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary difference, tax loss carryovers and other tax reductions.

Question 63

Intraperiod tax allocation and disclosure
Welyhorsky Inc. presents you with the following information for its taxation year ending December 31, 2021. $\begin{array}{lrrr} \text{ Income from continuing operations before income taxes }& &\$ 600,000 \\\\\text{ Gain on discontinued operations} && 50,000 \\\\\text{ Correction of prior year's error in recording } \\\text{ depreciation expense on equipment. The depreciation }\\\text{ expense was understated in 2020 and the capital cost } \\\text{ allowance was correctly calculated. } && 10,000 \\\\\text{ An unrealized holding gain on investments accounted } \\\text{ for at fair value through other comprehensive income} \\\text{ (FV-OCI). Assume that this will be taxable as ordinary } \\\text{ income when it is realized } && 20,000 \\\\\text{ Taxrate all vears } && 25\% \\ \end{array}$ Instructions
a) Determine how and where the current tax expense or benefit will be reported for Welyhorsky Inc. in 2021 and provide the journal entry to record current income tax.
(b) Assume that the $ 20,000 temporary difference between the carrying amount of the FV-OCI investments and their tax base is the only temporary difference in this year. Calculate Deferred Taxes and prepare the related journal entry.
c) Prepare the necessary journal entry for the correction of prior year error.
d) Show all income tax items calculated above in their appropriate financial statement.

Question 64

Taxable loss carryforward with valuation allowance (ASPE)
In 2020, its first year of operations, Jersey Inc. reported a $ 200,000 loss for tax purposes. However, in 2021, Jersey reported $ 250,000 taxable income. The tax rate is 20%, and is likely to remain at this rate for the foreseeable future. Jersey is a private corporation reporting under ASPE.
Assume Jersey's management thinks, at the end of 2020, that it is likely that the loss carryforward will not be realized in the near future. Jersey chooses to use the valuation allowance method for loss carryforwards.
Instructions
a) What entries (if any) would be prepared in 2020 to record the loss carryforward?
b) What entries (if any) would be prepared in 2021 to record the current and future income taxes and to recognize the loss carryforward?

Question 65

Deferred tax asset
a) Describe a deferred tax asset.
b) Under IFRS, when should a deferred tax asset be recognized?

Question 66

Deferred income taxes
Seenath Ltd., at the end of 2020, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: $\begin{array}{lr}\text { Pre-tax account ing income } & \$ 300,000 \\\text { Excess CCA claimed for tax purposes } & (600,000) \\\text { Estimated expenses deduct ible when paid } & \$ 500,000 \\\text { Taxable income } & \$ 200,000\end{array}$ Use of the depreciable assets will result in taxable amounts of $ 200,000 in each of the next three years. The estimated expenses of $ 500,000 will be deductible in 2023 when settlement is expected to be made.
The enacted tax rate is 25% and is not expected to change.
Instructions
a) Prepare a schedule of the deferred taxable and deductible amounts.
b) Prepare the required adjusting journal entries to record income taxes for 2020.

Question 67

Taxable income and accounting income
Explain the difference between accounting income and taxable income.

Question 68

Change in tax rates
Vansatia Construction Inc. uses the completed contract method for tax purposes and the percentage completion method for accounting purposes Assume that on July 15, 2020, a new income tax rate is enacted that lowers the corporate rate from 30% to 28%, effective January 1, 2022. Vansatia Construction Inc. has one temporary difference at the beginning of 2020 related to $ 1 million tax deferral from using the completed contract method. Vansatia therefore had a Deferred Tax Liability account at January 1, 2020 with a balance of $ 300,000 ($ 1,000,000 × 30%). The $ 1,000,000 in gross profit recognized to date is expected to be taxed in 2023.
Instructions
a) Calculate the deferred tax liability at July 15, 2020 after taking into account the change in tax rates and prepare the related journal entry at that date.
b) Discuss if the impact of the change in rates is required to be disclosed or not under IFRS and ASPE.

Question 69

Taxable loss carryforward without valuation allowance (IFRS)
In 2020, its first year of operations, Liu Inc. reported a $ 500,000 loss for tax purposes. However, in 2021, Liu reported $ 200,000 taxable income. The tax rate is 25%, and is likely to remain at this rate for the foreseeable future. Harriet reports under IFRS.
Assume that, at the end of 2020, because it is a new company, Liu's management thought that it was probable that the loss carryforward would not be realized in the near future.
However, by the end of 2021, management feels it is now probable that there will be future taxable incomes against which the 2020 loss could be applied.
Instructions
a) What entries (if any) would be prepared in 2020 to record the loss carryforward?
b) What entries (if any) would be prepared in 2021 to record current and deferred taxes and to recognize the loss carryforward?

Question 70

Differences between accounting and taxable income and the effect on future income taxes
The following differences apply to the reconciliation of accounting income and taxable income of Kulik Inc. for calendar 2020, its first year of operations. The enacted income tax rate is 30% for all years. $\begin{array}{lr}\text { Pre-tax account ing income } & \$ 450,000 \\\text { Excess CCA } & (240,000) \\\text { Lawsuit accrual } & 35,000 \\\text { Unearned rent revenue deferred on the books but correctly } & \\\quad \text { included in taxable income } & 25,000 \\\text { Dividend income from Canadian corporations } &\underline{\text{ (10,000) }} \\\text { Taxable income } & \$ 260,000\end{array}$
1. Excess CCA will reverse equally over a four-year period, 2021-2024.
2. It is estimated that the lawsuit accrual will be paid in 2024.
3. Unearned rent revenue will be recognized as earned equally over a four-year period, 2021-2024.
Instructions
a) Prepare a schedule of future taxable and deductible amounts.
b) Prepare a schedule of any deferred tax asset and/or deferred tax liability.
c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Calculate the net deferred tax expense (benefit).
d) Prepare the adjusting journal entries to record income tax expense, deferred taxes, and income taxes payable for 2020.

Question 71

Taxable temporary difference
Explain what a taxable temporary difference is and why a deferred tax liability is recognized.

Question 72

Comparing IFRS and ASPE for income tax purposes
What are the major differences between IFRS and ASPE as it relates to income tax accounting?

Question 73

Interperiod tax allocation with change in enacted tax rates
Harrow Corp. purchased equipment for $ 180,000 on January 2, 2020, its first day of operations. For book purposes, the equipment will be depreciated straight-line over three years with no residual value. Pre-tax accounting incomes and taxable incomes are as follows: $\begin{array}{lrrr} & \underline{2020} & \underline{2021} & \underline{2022} \\\text { Pre-tax account ing income } & \$ 124,000 & \$ 140,000 & \$ 150,000 \\\text { Taxable income } & 100,000 & 140,000 & 174,000\end{array}$ The reversible difference between pre-tax accounting income and taxable income is due solely to the use of CCA for tax purposes.
Instructions
a) Prepare the adjusting journal entries to record income taxes for all three years (expense, deferred tax assets/liabilities, etc.), assuming that the enacted income tax rate for all three years is 30%.
b) Prepare the adjusting journal entries to record income taxes for all three years (expense, deferred tax assets/liabilities, etc.), assuming that the enacted income tax rate for 2020 is 30% but that in the middle of 2021, Parliament raises the income tax rate to 35%, retroactive to the beginning of 2021.

Question 74

Comprehensive income tax situation with multiple differences (ASPE)
Vansadia Ltd., a private corporation which follows ASPE, is in the process of preparing its financial statements for its second year of operations ending December 31, 2020. Pertinent information follows:
1. Accounting income before tax is $ 1,500,000.
2. Depreciation on property, plant and equipment (PPE) in the books is $ 150,000 and CCA claimed will be $ 250,000. At the beginning of the year, the book value of the PPE was $ 1,200,000.
3. The company sells a product with a 2-year warranty. The estimated warranty cost is $ 100 per unit. At the beginning of 2020, the balance in the warranty liability account was $ 400,000. During 2020, the company sold 5,000 units of the product and paid out $ 200,000 in warranty costs. It expects that the adjusted warranty liability balance at the end of 2020 to be spent evenly over 2021 and 2022. At the end of 2019, the company also expected the adjusted warranty liability amount to be paid evenly over 2020 and 2021.
4. The beginning balance of the future income tax liability account related to the PPE was $ 60,000. The beginning balance of the future income tax asset account related to the warranty was $ 160,000.
5. The accounting income before tax included $ 50,000 in entertainment expenses, of which only 50% can be deducted for income tax purposes.
6. At the beginning of 2020, the enacted income tax rate went down from 40% to 35%.
7. On December 31, 2020, the company received three years advance rent income (for 2021 through 2023) of $ 90,000, which was recorded as unearned revenue for book purposes, but which must be reported as 2020 revenue for income tax purposes.
Instructions
a) Reconcile accounting income before tax to taxable income for 2020.
b) Prepare the required income tax related journal entries for 2020.
c) Prepare the bottom section of the 2020 income statement, beginning with income before income taxes.
d) What are the amounts and the SFP classifications of the future income tax asset and liability accounts at December 31, 2020?