Reference no: EM132518232

BUSI 3423 Intermediate Accounting - Yorkville University

Problem 6.1

Dragonite Ltd. had accounting income of $156,000 in 2018. Within this accounting income figure is the CEO's life insurance expense of $5,000, which is not deductible for tax purposes. In addition, the undepreciated capital cost (UCC) for tax purposes is $14,000 lower than the net carrying amount of the property, plant, and equipment, although the amounts were equal at the beginning of the year.

Required:
1) Prepare Dragonite's journal entry to record 2018 taxes, assuming IFRS was used and a tax rate of 25%.

Problem 6.2

Smash-IT, a maker of children's toys, incurred a net operating loss of $580,000 in 2018.

Combined income for 2015, 2016, and 2017 was $460,000. The tax rate for all years is 30%.

Required:
1) Prepare the journal entries to record the benefits of the carryback and the carryforward, assuming it is more likely than not that the benefits of the loss carryforward will be realized.

Problem 6.3

The following are independent situations which occurred in Cold Tech Corp.

a) The company settles its retirement obligation on a freezing platform that is put out of service. The actual settlement was less than the amount accrued, and the company recognizes a gain on settlement in its accounting net income.
b) Estimated warranty costs (covering a three-year warranty) are expensed for financial reporting purposes at the time of sale but deducted for income tax purposes when they are paid.
c) Equity investments have a quoted market value that is recorded at fair value through net income and is adjusted to their fair value at the balance sheet date.
d) The depreciation on equipment is different for book and income tax purposes because of different bases of carrying the asset, which was acquired in a trade-in. The different bases are a result of different rules that are used for book and tax purposes to calculate the cost of assets acquired in a trade-in.

e) A company properly uses the equity method to account for its 30% investment in another taxable Canadian corporation. The investee pays non-taxable dividends that are about 10% of its annual earnings.
f) Management determines that the net realizable value of the inventory is below cost, causing a write-down in the current year.
g) A company reports a contingent loss (ASPE) or provision (IFRS) that it expects will
result from an ongoing lawsuit. The loss is not reported on the current year's tax return. Half the loss is a penalty it expects to be charged by the courts. This portion of the loss is not a tax-deductible expenditure, even when it is paid.
h) The company uses the revaluation model for reporting its land and buildings. Due to current economic conditions, the fair value of the properties declined and the write- down was recorded against the revaluation surplus reported in equity.

Required:
For each of the situations above:
1) Indicate whether it results in a reversing (timing) difference or a permanent difference in the year. Be sure to note any differences between ASPE and IFRS.

Problem 6.4

Alakazam Corp. began business on January 1, 2016. At December 31, 2016, it had a $4,500 balance in the Deferred Tax Liability account that pertains to property, plant, and equipment acquired during 2016 at a cost of $900,000. The property, plant, and equipment is being depreciated on a straight-line basis over six years for financial reporting purposes, and is a Class 8-20% asset for tax purposes. Alakazam's income before income tax for 2017 was $60,000. Alakazam Corp. follows IFRS and the half-year convention for depreciation.

The following items caused the only differences between accounting income before income tax and taxable income in 2017.

a) In 2017, the company paid $56,250 for rent; of this amount, $18,750 was expensed in 2017. The other $37,500 will be expensed equally over the 2018 and 2019 accounting periods. The full $56,250 was deducted for tax purposes in 2017.
b) Alakazam pays $9,000 a year for a membership in a local golf club for the company's president.
c) Alakazam now offers a one-year warranty on all its merchandise sold. Warranty expenses for 2017 were $9,000. Cash payments in 2017 for warranty repairs were $4,500.
d) Meals and entertainment expenses (only 50% of which are ever tax deductible) were $12,000 for 2017.
e) The maximum allowable CCA was taken in 2017. There were no asset disposals for 2017. Income tax rates have not changed since the company began operations.

Required:
1) Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2017.
2) Calculate income tax payable for 2017.
3) Prepare the journal entries to record income taxes for 2017.
4) Prepare the income tax expense section of the income statement for 2017, beginning with the line "Income before income tax."
5) Indicate how deferred taxes should be presented on the December 31, 2017 statement of financial position.
6) How would your response to parts (a) to (e) change if Alakazam reported under ASPE?

Attachment:- Intermediate Accounting.rar