Table A below contains data relating to Carrot Ltd.’s accounting income and taxable income situation for its 2016 to 2018 fiscal years. Carrot Ltd. is a public company.

TABLE A
ACCOUNTING / TAX DATA – CARROT LTD.
	2016	2017	2018
Net Income (Pre-Tax)	$ 460,000	$(1,826,000)	$ 335,000
Depreciation (accounting)	$ 40,000	$ 40,000	$ 40,000
Capital Cost Allowance (Tax)	$ 120,000	-	$ 84,000
Dividends Received (accounting)	$ 202,000	$ 65,000	$ 227,000
Political contributions (accounting)	$ 95,000	$ 98,000	$ 94,000
Interest on taxes (accounting)	$ 35,000	-	$ 25,000
Relevant Tax Rates	25%	30%	35%
Notes:
1. Assume that 2016 is the first year of operations, and that the original cost of the capital property in respect of which the Depreciation and CCA is being taken is $400,000.
2. Assume tax rates are enacted in the year they apply.
3. Assume that Carrot Ltd. has a December 31 fiscal yearend.

REQUIRED:

1. Explain how the “probability” principle affects accounting for income tax losses. (4 marks)

2. Prepare the income tax related journal entries (with supporting schedules) for all of the three fiscal years shown in Table A, assuming the realization of Carrot Ltd.’s loss carry-forwards at all material times is probable. (26 marks)

Answer rating: 100% (QA)

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