Reference no: EM133136949
Question - Pharoah Corporation has provided the following information for the year ended December 31, 2020.
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Pharoah Corporation
Income Statement
For the Year Ended December 31, 2020
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Revenue
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Service Revenue
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100,000
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Dividend Revenue
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8,500
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$108,500
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Operating Expenses
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Supplies Expense
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1,800
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Depreciation Expense
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18,000
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Advertising Expense
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900
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Meals and Entertainment Expense
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5,500
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Rent Expense
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9,000
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Litigation Expense
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7,500
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Salaries and Wages Expense
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38,000
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Warranty Expense
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3,800
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84,500
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Operating Income before income tax
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$24,000
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Additional Information:
1. Pharoah is privately owned, and uses ASPE. The dividend revenue represents dividends received from taxable Canadian corporations.
2. Pharoah's income tax rate is 30%.
3. On January 1, 2020, Pharoah had a future tax liability of $2,700 related to its property, plant, and equipment (PPE).
4. During the year warranty expense of $3,800 was accrued. One half of this amount was paid during 2020. This is the first year Pharoah offers warranties on services rendered.
5. Property, plant, and equipment was purchased for $90,000 on January 1, 2019. These assets are being depreciated on a straight-line basis over five years with no residual value and have a 20% CCA rate. This PPE is considered "eligible equipment" for purposes of the Accelerated Investment Incentive (the "AII") (under the AII, instead of using the half-year rule, companies are allowed a first-year deduction using 1.5 times the standard CCA rate).
6. On July 1, Pharoah was sued by a competitor. Although the lawsuit has not been finalized, management believes that it is likely that a settlement will be reached in the next year for $7,500.
7. On November 30, $3,600 cash was paid in advance for four months of advertising, starting Dec. 1.
Required -
1. Calculate taxable income and taxes payable for 2020.
2. Prepare the journal entries to record 2020 income taxes (current and future).
3. Explain how the future tax amounts will be shown on the balance sheet.
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