Question

Christina Inc. follows IFRS and accounts for financial instruments based on IFRS 9. Christina holds a variety of investments, some of which are accounted for at fair value through net income and some of which are accounted for at fair value through other comprehensive income. On January 1, 2017, the beginning of the fiscal year, Christina’s accounts and records include the following information: Cost Market Value Fair value through net income investments $60,000 $60,000 Fair value through other comprehensive income investments 71,000 71,000 Market values for the FV-NI investments and FV-OCI investments at December 31, 2017 were $58,000 and $75,000, respectively. Computers that are used to track investment performance were purchased during 2017 for $10,000. For tax purposes, assume the computers are in Class 10 with a CCA rate of 30%. Depreciation expense for the year was $2,000. Christina recorded meals and entertainment expenses of $24,000 related to “wining and dining” clients. The CRA allows 50% of these costs as a deductible business expense. Christina’s income before income tax for 2017 is $110,000. This amount does not include any entries to adjust investments to market values at December 31, 2017. Christina’s tax rate for 2017 is 25%, although changes enacted in tax legislation before December 31, 2017 will result in an increase in this rate to 30% for 2018 and subsequent taxation years. Assume that these rates apply to all income that is reported. There were no deferred tax accounts at January 1, 2017. Instructions (a) Prepare journal entries to refl ect the difference between the carrying amount and market value for the above investments at Christina’s year end of December 31, 2017. (b) Explain the tax treatment that should be given to the unrealized gains or losses reported on Christina’s statement of income and statement of comprehensive income. (c) Calculate the deferred tax asset or liability balances at December 31, 2017 and indicate their classifi cation. (d) Calculate taxable income and income tax payable for 2017. (e) Prepare the journal entries to record income taxes for 2017.

Answer 1

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Answer: a) Journal errtry unrealized gain cor) loss al or Too Fv-NE Investments & 2000 2000 4000 FV-Och To Investments unrealized ALL or gain cor) loss -ou $ 4000 b) All of Christina's investments must be reported on the Statement of finanual position at they tair value. The resulting difference between this and the day base of the investments e presents a temporary difference. The unrealized gain recognized is not taxable, and any unreated loss recognized is not deductible, until the investments are sold at a gain con at a loss. The resulting torable temporary difference- most have the corresponding deterred tax recorded at the tax rate that christina expects to pay (or recover in the case of a loss) on this gain cor) loss in Estore accounting periods. In this case the enacted rate is 30t.. this rate needs to be applied to arrive at the amount of any deferred taxes.

Statement of financial position Account Dec 31, 2017 Tax corrying Amount Deductible (1ахаЫe) Temporary Differences Deferred 18 Asset/Cliable Bose Date x sot. $ 150 600 (1200) Equipment 5 8500 $8000" & Joo FX-NE Investments 60000 18000 2000 301 Fv-oct Investments 71000 5ooo (4000) 301. Deferred tax liability, December 31, 2017 Deferred tax asser / trability before adjustment Increased an deferred tax liability, and deferred tax (450) ($450) expense for 2017 ICCA is £ 10000*365* a year role = $ 1500] partca) $110000 Accounting income [excludes entries in as no tax effect] permanent difference : 50% of meals y entertainment $12000 of $ 24000 $120000 Reversing difference o Depreciation expense capital cost allowance Taxable income → f 2000 (1500) $500 १२२500 corrent Income tax rate @ 25t. $30625

e) * $30625 Journal entries entries current tax expense Alc Dr To Income tax payable Deferred tox Asset Alc or To Deferred tax benefit $30625 * $750 $750 * $1200 Deferred To tax expense - oci ale or Deferred tax liability $ 1200