Devon Ltd. began business on January 1, 2018, and applies IFRS in it is financial reporting. Devon Ltd.'s income before income tax for 2019 was $250,000.

The following items caused the only differences between accounting income before income taxes and net income for tax purposes for the year ended Dec 31, 2019:

(a) Devon ltd. Pays $8,000 a year for membership in a local golf club for the company’s best employee for the year. This expense is not accepted under tax rules

(b) Accounting income includes $15,000 in dividends (10,000 received from taxable Canadian corporations and 5,000 from their investments in Japan)

(c) Rent paid in advance on January 1, 2019, totaled $60,000 for a three-year period. The full amount was reported as prepaid rent expense for accounting purposes on January 1, 2019. Devon Ltd. will report the rent expense for accounting purposes on an accrual basis; evenly over the next three years from 2019 to 2021.

(d) Devon Ltd. paid a $2,000 interest penalty for late income tax installments. The interest penalty is not deductible for tax purposes at any time.

(e) Devon deducts from it is accounting income amount of $12,000 for meals and entertainment (only 50% are deductible for tax purposes)

(f) Devon ltd. offers a one-year warranty on all its merchandise sold. Warranty expense for 2019 accrued and deducted for accounting purposes was $6,000. Cash payments on 2019 for warranty repairs were $0.00 (none)

(g) Income includes $20,000 accounting capital gain from selling a property during 2019. For tax purposes only 50% of the capital gain is taxable. (Assume the capital gain calculated the same for tax and accounting purposes)

- The tax rates are 30% for 2019 and subsequent years. The tax rates are enacted and have been known for the past two years.

Required:

1- Reconcile net accounting income to net income for tax purposes for the year 2019 (i.e. begin with accounting net income and add or deduct the temporary and permanent differences to calculate net income for tax purposes). Apply the appropriate tax rate to calculate the current tax expenses for 2019. 

2- Calculate the balance in the deferred tax asset or liability account as of December 31, 2019. Since Devon Ltd. began operations on Jan.1, 2019, you can assume that the opening balance in the deferred tax asset or liability account is zero. 

3- Prepare the appropriate journal entries to record current and deferred income tax for 2019.

Answer rating: 100% (QA)

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