Reference no: EM133070258
Question - Crooks Developments began operations in October, 2019 and adopted ASPE. It uses the future tax method to account for income taxes.
When property is sold on an instalment basis, Crooks recognizes instalment income for accounting purposes in the year of the sale. For tax purposes, instalment profit is recognized as cash collections relating to the properties are made. Gross profit from instalment sales for 2019 was $600,000 (net proceeds to be collected are $2,400,000) and will result in taxable profit as collections are made over the next three years (with the respective tax rates, enacted in 2019) as follows:
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Collection of net proceeds
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Tax rate in year
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2020
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$1,200,000
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40%
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2021
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$600,000
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40%
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2022
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$600,000
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40%
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Crooks also had product warranty expenses for accounting purposes in 2019 of $100,000 of which only $20,000 was paid in cash (tax deductibility is only for cash payments) with the balance estimated to be paid equally over the next two years.
Pretax accounting income for 2019 was $410,000 and the pretax accounting loss was $200,000 for 2020. In both years these amounts included dividend revenue from taxable Canadian corporations of $40,000 which is not taxable. The tax rate in 2019 was 30%.
Any tax losses are expected to be used against future taxable income within the carryforward period.
Required -
1. Determine Crooks Developments taxable income or loss in each of 2019 and 2020.
2. Prepare the appropriate journal entries to record Case's 2019 and 2020 income taxes.
3. Provide the income statement excerpt for Case beginning with net income before tax for 2019 and 2020.
4. How should the future income tax amounts be classified in the balance sheet at December 31, 2019?
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