OJ Corporation uses the liability method of tax allocation. At the beginning of 2016, OJ Corporation has the following deferred income tax accounts:

Deferred income tax asset — warranty: $18,000

Warranty expense to December 31, 2015, was $250,000 and claims paid were $160,000, leaving a $90,000 warranty liability balance in the current liabilities section of the balance sheet on that date.

Deferred income tax liability — fixed assets: $151,200

At the beginning of 2016, the net carrying amount of fixed assets was $1,511,000 and UCC (tax basis) was $755,000.

The following information relates to the year 2016:

1. Accounting income before income taxes was $449,000.
2. Warranty claims paid out for the year were $40,000. The year-end warranty liability balance was $75,000 after 2016 warranty accruals were recorded.
3. Depreciation on fixed assets was $302,200. CCA claimed was $151,000.
4. OJ holds 30% of NB Co.'s shares and recorded investment income of $68,000.

OJ has significant influence and uses the equity method of accounting.
5. OJ’s books show expenses of food & entertainment for $18,200.
6. On January 1, 2016, the government unexpectedly changed the income tax rate from 20% to 30%, effective immediately.
7. OJ paid tax installments for 2016 in the amount of $135,000.


a. For each of the above items 2) to 5), indicate whether the item is a permanent or temporary difference for tax accounting purposes.

b. Calculate the income taxes payable for OJ for 2016.

c. Prepare a classified balance sheet as at December 31, 2016 for the tax-related accounts only.

d. Prepare all the 2016 journal entry(ies) to record income tax expense for OJ.

Answer rating: 100% (QA)

a for each of the above items 2 to 5 indicate whether the item could be a permanent or temporary difference for tax accounting purposes 2 Temporary difference Because at the start the warranty paid ou... View the full answer