Question

Zdon Inc. reports accounting income of $105,000 for 2017, its fi rst year of operations. The following items cause taxable income to be different than income reported on the financial statements.

1. Capital cost allowance (on the tax return) is greater than depreciation on the income statement by $16,000.

2. Rent revenue reported on the tax return is $24,000 higher than rent revenue reported on the income statement.

3. Non-deductible fi nes appear as an expense of $15,000 on the income statement.

4. Zdon’s tax rate is 30% for all years and the company expects to report taxable income in all future years. Zdon reports under IFRS.
Instructions

(a) Calculate taxable income and income tax payable for 2017. (b) Calculate any deferred tax balances at December 31, 2017.

(c) Prepare the journal entries to record income taxes for 2017.

(d) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income tax.” (e) Reconcile the statutory and effective rates of income tax for 2017. (f) Provide the statement of fi nancial position presentation for any resulting deferred tax accounts at December 31, 2017. Be specifi c about the classifi cation. (g) Repeat part (f) assuming Zdon follows ASPE.

Answer 1

Part A

Accounting income	$105000
Permanent differences:
Non-deductible fines	15000
	120000
Reversing differences:
Excess of CCA over depreciation	(16000)
Excess rent collected over rent earned	24000
Taxable income	$128000
Current income taxes – 30%	$38400

Part B

Statement of financial position	Deductible (Taxable)		Deferred Tax	for ASPE
Account	Temporary Differences	Tax rate	Asset (Liability)	Current or long-term
PP & E	(16000)	30%	(4800)	Long-term
Unearned rent revere	24000	30%	7200	Long-term
Deferred tax asset, Dec. 31, 2017			2400	Current
Deferred tax asset before adjustment			0
Increase in deferred tax asset, and deferred tax benefit for 2017			2400

Part C

No.	General journal	Debit	Credit
1	Current Tax Expense	38400
	Income Tax Payable		38400
2	Deferred Tax Asset	7200
	Deferred Tax Benefit		2400
	Deferred Tax Liability		4800

Part D

Income before income tax		105000
Income tax expense
Current	38400
Deferred	(2400)	36000
Net income		$69000

Part E

Effective tax rate = 34.3%

		@ 30%	Divided by Accounting income
Accounting income	105000	31500	30.0%
Non-deductible fines	15000	4500	4.3%
		36000	34.3%

Part F

Non-current assets
Deferred tax asset	$2400

Part G

Current assets
Future tax asset	$7200
Non-current liabilities
Future tax liability	$4800