QUESTION 2

1. 3A

   Explain, with appropriate examples, the difference between accounting income and taxable income. (4 Marks)

   The concepts of Deferred/Future Tax Asset/Liability can be very confusing to the untaught. Can you explain what these are and examples of what give rise to these financial statement line items in a companys financial statements? (4 Marks)

   3B (1)

   A reconciliation of Quebec Corp.'s pre-tax accounting income with its taxable income for 2020, its first year of operations, is as follows:

   Pre-tax accounting income $ 3,000,000

   Excess CCA (90,000)

   Taxable income $ 2,910,000

   The excess CCA will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2020, 35% in 2021, and 30% in both 2022 and 2023. The total deferred tax liability to be reported on Quebec's SFP at December 31, 2020 is? (3 Marks)

   3B (2)

   At the end of 2020, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:

   Pre-tax accounting income $ 300,000

   Estimated lawsuit expense 750,000

   Instalment sales (600,000)

   Taxable income $ 450,000

   The estimated lawsuit expense of $ 750,000 will be deductible in 2022 when it is expected to be paid. The instalment sales will be realized at $ 300,000 in each of the next two years. The income tax rate is 30% for all years. The total income tax expense to be reported on the income statement is (3 Marks)

   3C

   Gretna Corp. reported the following results for calendar 2020, its first year of operations:

   Pre-tax accounting income $ 250,000

   Taxable income 400,000

   The difference between accounting income and taxable income is due to a temporary difference, which will reverse in 2021. Assuming that the enacted tax rates in effect are 30% in 2020 and 25% in 2021, what amount should Gretna record as the deferred tax asset or liability for calendar 2020? (3 Marks)

   3D

   For calendar 2020, its first year of operations, Snow Corp. reported pre-tax accounting income of $ 330,000 and taxable income of $ 600,000. The only reversible difference is accrued warranty costs, which are expected to be paid as follows:

   2021 $ 90,000

   2022 45,000

   2023 45,000

   2024 90,000

   The enacted income tax rates are 35% for 2020, 30% for 2021, 2022 and 2023, and 25% for 2024. The deferred tax asset reported on Snows December 31, 2020 SFP should be? (4 Marks)

   3E

   Shierling Corp. reported pre-tax accounting income of $ 750,000 for calendar 2020. To calculate the income tax liability, the following data were considered:

   Non-taxable portion of capital gains $ 30,000

   CCA in excess of depreciation 60,000

   Instalment tax payments made during 2020 150,000

   Enacted income tax rate for 2020 30%

   What amount should Shierling report as its current income tax liability on its December 31, 2020 SFP? (4 Marks)