The following information relates to Pearline Corporation’s transactions during 2011, its first year of operations.
1. Income before taxes on the income statement for 2011 was $110,000.
2. In addition, Pearline reported a loss due to the writedown of land of $46,000 for financial reporting purposes.
3. Pearline reported a tax-deductible financing charge of $5,700 on its 2011 statement of retained earnings. The charge is for interest on a financial instrument that is legally debt, but in substance is equity for financial reporting purposes.
4. The tax rate enacted for 2011 and future years is 40%. Since this was Pearline Corporation’s first taxation year, no instalments on account of income taxes were required or paid by Pearline.
5. Differences between the 2011 GAAP amounts and their treatment for tax purposes were as follows:
(a) Warranty expense accrued for financial reporting purposes amounted to $15,000. Warranty payments deducted for taxes amounted to $12,000. Warranty liabilities were classified as current on the balance sheet.
(b) Of the loss on writedown of land of $46,000, 25% will never be tax deductible. The remaining 75% will be deductible for tax purposes evenly over the years from 2012 to 2014. The loss relates to the loss in value of company land due to contamination.
(c) Gross profit on construction contracts using the percentage-of-completion method for book purposes amounted to $30,000. For tax purposes, gross profit on construction contracts amounted to $0 as the completed-contract method is used and no contracts were completed during the year. Construction costs amounted to $270,000 during the year.
(d) Depreciation of property, plant, and equipment for financial reporting purposes amounted to $60,000. CCA charged on the tax return amounted to $80,000. The related property, plant, and equipment cost $300,000 when it was acquired early in 2011.
(e) A $3,500 fine paid for a violation of pollution laws was deducted in calculating accounting income.
(f) Dividend revenue earned on an investment was tax exempt and amounted to $1,400.
6. Taxable income is expected for the next few years.
Pearline Corporation follows the PE GAAP future income taxes method.
(a) Calculate Pearline Corporation’s future income tax asset or liability at December 31, 2011.
(b) Calculate the taxable income for 2011. Show all details of the adjustments to accounting income to arrive at taxable income.
(c) Prepare the journal entry(ies) to record income taxes for 2011.
(d) Prepare a partial 2011 income statement, beginning with “Income before income taxes and extraordinary items.”
(e) Prepare a statement of retained earnings for the year ended December 31, 2011, assuming no dividends were declared in the year.
(f) Show how the balance of the future income tax asset or liability account will be reported on the December 31, 2011 balance sheet.
(g) Calculate the effective rate of tax. Provide a reconciliation and explanation of why this differs from the statutory rate of 40%. Begin the reconciliation with the statutory rate.
(h) How would your response to (f) change if Pearline Corporation followed IFRS?

  • CreatedAugust 23, 2015
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