Financial Reporting The following information pertains to Company B (CB), a public company with a December 31
Question:
Financial Reporting
The following information pertains to Company B (CB), a public company with a December 31 year end. In 2019 the enacted combined federal and provincial income tax rate was 48% of taxable income. In June 2020 the federal government enacted a reduction in the federal income tax rate such that the combined enacted income tax rate was 43% of taxable income, effective January 1, 2020. Net income before taxes was $550,000 in 2019 and $925,000 in 2020.
Repairs under warranty are recognized on the accrual basis for financial statement purposes. For income tax purposes, repairs under warranty are deductible as an expense only in the period in which they are paid. In 2020, the accrued warranty liability per books decreased by $210,000 to $ 320,000. This includes cash payments of $ 300,000 that were made in the year.
In 2020, depreciation was $87,000 for GAAP purposes and capital cost allowance (tax depreciation) was $62,000. In addition, CB had to write down an asset per GAAP since it was impaired. The amount of the writedown was $ 50,000. This write down is not recognized for tax purposes—instead the asset remains at its tax amount and is depreciated as normal.
In 2016, CB incurred $125,000 of costs in relation to the development of a new product. These costs were deducted in full for tax purposes in 2016. For accounting purposes, the enterprise correctly capitalized this expenditure and is amortizing it on a straight line basis over five years beginning in 2016.
There is a long term receivable on the balance sheet of $ 325,000. This amount represents sales made on an instalment plan. The receivable was $ 400,000 in 2019. Only cash payments are considered taxable for tax purposes. There were no instalment sales made in 2020.
Accounting income for 2020 contains a $50,000 expense for non-tax-deductible life insurance premiums on CB's executives.
Other than the opening deferred tax balances for the items above noted above there is an opening deferred tax liability of $48,000 resulting from the difference in tax value and GAAP value of fixed assets. They also had an opening deferred tax asset of $ 96,000 remaining from a loss incurred previously. This loss carry forward expires this year.
Required:
Prepare the journal entries for current and deferred tax for 2020.
Calculate the required rate change disclosures for 2020.
Canadian Income Taxation planning and decision making
ISBN: 9781259094330
17th edition 2014-2015 version
Authors: Joan Kitunen, William Buckwold