Reference no: EM132567997

Question - Agarma Company Limited (Agarma) began business on January 1, 2019 and follows accounting standards for private enterprises (ASPE). Company accounting records show the following data for Agarma's first fiscal year ended December 31, 2019:

Revenue recorded on the company's books from instalment sales was $200,000. Actual cash collection of instalment receivables during the year was $150,000. Instalment sales are recognized in the period of sale for accounting purposes but are taxable when cash is received.

Golf club dues paid by Agarma during the year were $3,800. Golf club dues are not a deductible expense for income tax purposes.

Agarma bought machinery on January 2, 2019 for $300,000. For financial accounting purposes Agarma depreciates the machinery using the straight-line method over a ten-year life (no residual value). For tax purposes, Agarma calculates CCA using a 20% declining balance method (the machinery qualifies for the Accelerated Investment Incentive of 1.5 times the regular CCA rate in the first year).

In 2019 Agarma recorded in revenue $9,000 of dividends received from a taxable Canadian corporation. These dividends are not taxable in the hands of Agarma.

The estimated warranty liability related to company sales in 2019 was $19,600. Warranty repair costs actually paid during 2019 were $13,600. The remainder will be paid in 2020. For financial accounting purposes Agarma accrues the warranty liability in the year of sale. However, warranty work is deductible for tax purposes only when paid.

Agarma's net income before tax for 2019 was $250,000.

For 2019, Agarma's income tax rate is 25%. On December 31, 2019 the applicable income tax rate for 2020 and future years unexpectedly declined to 23%.

Required -

a) Prepare the income tax expense section of Agarma's 2019 income statement.

b) What is Agarma's effective tax rate for 2019?

c) Prepare Agarma's 2019 income tax reconciliation for their tax note.