Question

Question 2 (10 marks) The following tax information is associated with Sam Corp.'s December 31, 20X6, fiscal year: • Sam's accounting income before taxes was $1,400,000. • Sam paid for golf memberships for several of its salespeople, senior managers, and executives. The total fees, dues and other costs related to golf memberships totalled $42,300. The salespeople frequently golf with customers, particularly their corporate customers who are frequent buyers. Meals and entertainment expenses totalled $72,400. When the payroll manager was on holidays, the payroll source deductions were remitted one week late. The Canada Revenue Agency charged penalties and interest of $3,000 • Sam held shares in the Rocky Mountain Western Bank, a taxable Canadian corporation. During 20X6, Sam received $4,500 in dividends. • Total warranty costs paid by Sam during 20X6 were $27,300. Warranty expense for the year was $32,500. .

Answer 1

Schedule for reconcilation of Accounting Income with that of Taxable Income

Total Accounting Income Befor tax = $1,400,000

ADD:- Expenses Deducted on accounting Base

1. Membership Fess paid = $42,300
2. Meals and Entertainment expense = $72,400
3. Penalties and Interest = $3,000
4. Warranty Cost Expense = $32,500
5. Depreciation = $585,000
6. CCA Claimed = $685,000
7. Pension Expense = $52,000

Gross Total Income before deducting Expenses = $2,839,700

LESS:- Expenses can be deducted based on Taxation Base

1. Membership Fees paid For employees = $42,300
2. Meals and Entertainment expense = $72,400
3. Warranty cost paid = $27,300
4. Depreciation = $494,000 [(585,000/4,500,000)*3,800,000]
5. CCA Claimed = $685,000
6. Pension Expense Paid = $34,000

Total Income before deducting Exempted income = $1,484,700

LESS:- Exempted Income

1. Dividend Income = $4,500

Total Income as per Taxation Base = $1,480,200

Calaculation of Deferred Income Tax Expense

Income Tax paid for the fiscal year 20x6 = $225,000

Income Tax Liability for the Fiscal year 20x6 = $371,175 (1484700*25%)

Balance to be Paid = $146,175

Deferred Income Tax expense = $371,175

Journal Entries for Income Tax Expense

On 31st December 20x6

For Treating expense in Profit and Loss Account

By Income Tax Expense A/c Dr $371,175

To, Income Tax Installment A/c $371,175

(Being Total Income tax is treated as a Liabilty to pay and as Expense)

By Profit and Loss A/c Dr $371,175

To, Income tax Expense A/c $371,175

(Being Expense Transferred to Profit and Loss A/c)

On 1st January 2017

By, Income tax Installment A/c Dr $225,000

To Bank A/c $225,000

(Being Income tax paid for first 3 quarters)

By, Income tax Installment A/c Dr $146,175

To Income Tax payable A/c $146,175

(Being Income tax installment A/c is closed and an Income tax payable A/c is Created)