Question

Chapter 13, Problem 13E

Melissa Corporation is domiciled in Germany and is listed on both the Frankfurt and New York Stock Exchanges. Melissa has chosen to prepare consolidated financial statements in accordance with U.S. GAAP for filing with the U.S. Securities and Exchange Commission but must also prepare consolidated financial statements in accordance with IFRS in accordance with European Union regulations.

On December 31, 2017, Melissa Corporation purchased a small office building for $1,380,000. For tax and financial reporting purposes, Melissa estimates that the building has a useful life of 40 years with an estimated residual value of $100,000. Melissa uses straight-line depreciation for financial reporting. Assume that, for tax purposes, Melissa is permitted to deduct 5% of an asset’s depreciable base in the first year. This is the only building that Melissa owns.

At the end of 2018, Melissa had the building appraised by a qualified real estate appraiser who estimated the fair value of the building was $1,172,500. Melissa intends to occupy the building itself, and therefore, the building is classified as property, plant, and equipment under both U.S. GAAP and IFRS. After being revalued under IFRS, the Building account has a balance of $1,172,500 and the Accumulated depreciation account has a balance of zero. Assume Melissa will have sufficient income in the future to recover any deferred tax assets that might be recognized.

	U.S. GAAP			IFRS
Model used for subsequent measurement		Cost		Revalued at fair value
Pre-tax income before depreciation and revaluation charge	$	500,000		$	500,000
Enacted tax rate*		35	%		35	%

*We are assuming, for simplicity, that the relevant tax rate is 35% for all jurisdictions where Melissa is required to pay income tax. No new tax laws are substantively enacted at December 31, 2017.

Required:

1. Calculate Melissa’s taxable income in 2018.
2. Prepare the journal entry to record Melissa’s 2018 income tax activity under U.S. GAAP.
3. Prepare the journal entry to record Melissa’s 2018 income tax activity under IFRS.

Answer 1

INCOME TAX ACTIVITY UNDER US GAAP ANAS ET HE 35%*4,36,000 Current tax Deferred tax Total tax expense 1,52,600 11,200 1,63,800 *Working of deferred tax Depreciation as per books Depreciation for tax purposes Temporary differences As the depreciation for tax purposes has been higher in the current year which implies that in the future there will be less deduction of depreciation for tax purposes, resulting in creation of deferred tax liability, Applicable tax rate 32,000 64,000 -32,000 35% Deferred tax liability will be created by the amount of $11.200 calculated as 35% 32,000, resulting in the passing of following journal entry- 11,200 Statement of profit or loss Deferred tax liability (Creation of deferred tax liability) 11,200

INCOME TAX ACTIVITY UNDER IFRS 35%*436000 Current tax Deferred tax* Total tax expense 1,52,600 -50,225 1,02,375 *Working of deferred tax Tax base of building (13,80,000-64,000) Carrying amount of building as on 31/12/2018 Temporary differences (Tax base - Carrying amount) As the temporary differences figure is positive, therefore, it represents deductible temporary differences, Accordingly, deferred tax asset will be created by the amount of $50,225 (35%*143,500) 13,16,000 11,72,500 1,43,500 Journal entry required will be 50,225 Deferred tax asset Statement of profit or loss (Creation of deferred tax asset) 50,225