Your next client, Ummy Syrups, Inc., is an importer of sweet syrups, honey and flavoured sugars. The sign “We R So Sweet” outside the company head office catches your eye as you walk in to meet Ms. Kandee Koanz, the manager with tax issues. She hands over an agenda sheet which she had prepared in advance listing all the events causing differences between pretax accounting and taxable income for 2020. You note the following:

         1.✏      Prior to 2019, there were only permanent differences, but no timing differences between accounting and taxable income.

         2.✏      In 2020, the company purchased bottling equipment costing $440,000 (with a useful life of four years and zero salvage) that it will depreciate on a straight-line basis for financial accounting reporting. For tax purposes, it is allowed to claim CCA of $180,000 in each of the first two years followed by $40,000 in each of the next two years (2022 and 2023).

         3.✏      On January 1, 2019, the company contracted to future delivery of 50,000 cases of its Golden Maple Syrup and on that date it received sales proceeds on all 50,000 cases in advance. The contract represents $1,000,000 in profit. It delivered 7,000 cases during 2019, 29,000 cases during 2020 and is scheduled to deliver the remainder in 2021.

         4.✏      Ummy Syrups invests in the shares of several of its supplier companies. Dividends from these investments are tax free and the company earned $7,200 in 2019, $9,000 in 2020

         5.✏      Ummy Syrups makes a promise to its customers in 2020: “We will give you a full refund if you become ill after eating our syrups on your pancakes.” The company estimates it might cost them up to 1% of their sales in meeting such refund claims and hence recorded an accrued warranty expense of $10,000. The company paid out $700 in 2020 for such claims.

         6.✏      Beginning in the current year, the company decided to insure the life of its new President, Mr. Vaunder Avey. The company is the beneficiary and it paid premiums of $5,700 in 2020. It also paid $12,000 for senior executives’ memberships to the Super Dooper Country club. Ms. Koanz was surprised to note that these expenses were disallowed for tax purposes.

         7.✏      Pension expense amounted to $180,000 for the year and it contributed $125,000 towards the funding of the plan- only tax deductible for actual contributions made.

         8.✏      The tax rate was 35% in 2019 and prior years. Unfortunately, the rate was raised to 40% for 2020 and future years. The tax rate for any given year is known to the company only in the year the rate is applicable.

         9.✏      Ms. Koanz informs that the profitability of the company’s operations has been declining in recent years. She attributed this trend to the Uranus’ government policies to combat obesity. High commodity taxes were levied on sweets and desserts. It reported pre-tax income of $82,000 for 2020 based on IFRS requirements. Loss carryforwards are 100% certain of future realization.

         10.✏     The company reported the following taxable incomes/(losses) for the preceding four years:

                         2019:         ($31,000)

                         2018:         $ 3,800

                         2017:         $18,000

                         2016:         $25,000

                        

The company has always had the practice of first carrying back any given year’s taxable loss against the earliest allowable taxable incomes and then carrying forward the remaining taxable to future expected taxable incomes and this was done wrt the 2019 loss also.

You complimented Ms. Koanz for her efficiency and well organized approach to this meeting. You welcomed a mug of hot chocolate lathered with Ummy’s ultra special chocolate syrup before setting your thoughts to resolving Ms. Koanz’ questions. You are aware that time is running out on you and suspect that your boss, Mr. Spaze Mann maybe calling in another assignment.

1. Compute the taxable income/(loss) for 2020.

   2.       Prepare the required journal entries to record any income tax effects for 2020 including for current

               taxes or loss carryforward/loss carryback, timing differences and tax rate change impacts. Assume that the company expected to

   generate sufficient taxable income in the carryforward periods to realize the benefits of the loss carried forward.

   3.      Prepare an income statement, in part, showing your computed figures for the income tax section beginning with Income before income tax.

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