Reference no: EM132988512

Question

Company A (CA), a public company, is in the process of preparing its financial statements for its second year of operations ending December 31, 2020.

Pertinent information follows:

1. Accounting income before tax is $2,500,000.

2. Depreciation on property, plant and equipment (PPE) is $475,000 and tax depreciation(CCA) claimed is $ 50,000. At the beginning of the year, the book value of the PPE was $1,500,000. CA purchased PPE costing $ 150,000 during 2020.

3. Company A sells a product with a 2-year warranty. The estimated warranty cost is $50 per unit. At the beginning of 2020, the balance in the warranty liability account was $200,000. During 2020, Company A sold 15,000 units of the product and paid out $400,000 in warranty costs.

4. The beginning balance of the Deferred Income Tax Liability account related to the PPE was $160,000.

5. The accounting income before tax included $100,000 in entertainment expenses, of which only 50% can be deducted for income tax purposes.

6. In 2020, the enacted income tax rate went down from 40% to 35%. This was not known in 2019.

7. CA has investments in the stock market that for accounting purposes are recorded at fair value though net income (FV-NI). For tax purposes tax is only paid on realized gains, specifically when the investments are sold. The gain on the sale for tax purposes is one half of the normal rate. The relevant amounts are as follows:

- Investments at fair value, end of current year $ 600,000
- Investments at cost, end of year $ 500,000
- Investments at fair value, beginning of year $ 400,000.
- Investments at cost, beginning of year $ 450,000.
- There were no sales of investments in the current year.
- CA acquired additional investments costing $ 50,000 in the current year.

Required:
Prepare journal entries to record current and deferred taxes. Give separate journal entries for each difference and indicate, as appropriate, the required note disclosure concerning rate changes.