Question

P18.6 The accounting records of Steven Corp., a real estate developer, indicated income before income tax of $850,000 for its year ended December 31, 2020, and of $525,000 for the year ended December 31, 2021. The following data are also available.

1. Steven Corp. pays an annual life insurance premium of $11,000 covering the top management team. The company is the named beneficiary.

2. The carrying amount of the company's property, plant, and equipment at January 1, 2020, was $1,256,000, and the UCC at that date was $960,000. Steven recorded depreciation expense of $175,000 and $180,000 in 2020 and 2021, respectively. CCA for tax purposes was $192,000 and $153,600 for 2020 and 2021, respectively. There were no asset additions or disposals over the two-year period.

3. Steven deducted $211,000 as a restructuring charge in determining income for 2019. At December 31, 2019, an accrued liability of $199,500 remained outstanding relative to the restructuring, which was expected to be completed in the next fiscal year. This expense is deductible for tax purposes, but only as the actual costs are incurred and paid for. The actual restructuring of operations took place in 2020 and 2021, with the liability reduced to $68,000 at the end of 2020 and to $0 at the end of 2021.

4. In 2020, property held for development was sold and a profit of $52,000 was recognized in income. Because the sale was made with delayed payment terms, the profit is taxable only as Steven receives payments from the purchaser. A 10% down payment was received in 2020, with the remaining 90% expected in equal amounts over the following three years.

5. Non-taxable dividends of $3,250 in 2020 and of $3,500 in 2021 were received from taxable Canadian corporations.

6. In addition to the income before income tax identified above, Steven reported a before-tax gain on discontinued operations of $18,800 in 2020.

7. A 30% rate of tax has been in effect since 2018.

Steven Corp. follows IFRS.

Instructions

a. Determine the balance of any deferred tax asset or liability accounts at December 31, 2019, 2020, and 2021.

b. Determine 2020 and 2021 taxable income and current tax expense.

c. Prepare the journal entries to record current and deferred tax expense for 2020 and 2021.

d. Identify how the Deferred Tax Asset or Deferred Tax Liability account(s) will be reported on the December 31, 2020 and 2021 statements of financial position.

e. Prepare partial income statements for the years ended December 31, 2020 and 2021, beginning with the line “Income from continuing operations before income tax.”

f. How would your response to parts (a) to (e) change if Steven Corp. reported under ASPE?

Answer 1

(a)

PP&E		Carrying amount		UCC		Difference				Tax 30%				Future Tax
Bal. Dec. 31, 2016		$ 1,256,000		$   998,000		$ (258,000)				$ (77,400)				Liability
For 2017		175,000		192,000		(17,000)				(5,100)
Bal. Dec. 31, 2017		1,081,000		806,000		(275,000)				(82,500)				Liability
For 2018		180,000		163,500		16,500				4,950
Bal. Dec. 31, 2018		$    901,000		$   642,500		$ (258,500)				$ (77550)				Liability
Restructuring Charges		Accrued Liability		Tax basis		Difference				Tax 30%				Future Tax
Bal. Dec. 31, 2016		$   (199,500)		$    -0-		$199,500		$59,850				Asset
For 2017		131,500		-0-		(131,500)		(39,450)
Bal. Dec. 31, 2017		(68,000)		-0-		68,000		20,400				Asset
For 2018		68,000		-0-		(68,000)		(20,400)
Bal. Dec. 31, 2018		$-0-		$ -0-		$ -0-				$ -0-

Profit on Property Sale		Deferred G/P deducted from A/R				Deferred Profit for Tax				Difference				Tax 30%				Future Tax
Bal. Dec. 31, 2016		$   -0-		-0-				-0-					-0-
For 2017		-0-		$     46,800				$    (46,800)					$ (14,040)
Bal. Dec. 31, 2017		-0-		46,800				(46,800)					(14,040)			Liability
For 2018		-0-		(15,600)				15,600					4,680
Bal. Dec. 31, 2018		-0-		$     31,200				$    (31,200)					$    (9,360)			Liability

(b)
Continuing operations:20172018Accounting income$850,000$525,000Permanent differences:Nondeductible life insurance11,000      11,000Nontaxable dividends        (3,250)      (3,500)     857,750   532,500Reversing differences:CCA & depreciation     (17,000)     16,500Restructuring charges   (131,500)    (68,000)Profit on property sale     (46,800)     15,600Taxable income     662,450   496,600Current income taxes – 30%$198,735$148,980

Discontinued operations:
Accounting income	$    18,800		$0
Permanent differences	0		0
Reversing differences	0		0
Taxable income	18,800		0
Current income taxes – 30%	$      5,640		$0

(c) December 31, 2017

Current Income Tax Expense................ 198,735

Income Tax Expense – Discontinued Operations         5,640

    Income Tax Payable ...................         204,375   

Future Income Tax Expense................. 58,590

        Future Income Tax Liability.......          58,590

December 31, 2018

Current Income Tax Expense..............    148,980

    Income Tax Payable ($495,350 X .30).           148,980   

Future Income Tax Expense...............     10,770

    Future Income Tax Liability.........           10,770

(d)

The following presentation is based on the assumption that the Account Receivable for the property sold in 2017 is all included in current assets. If the company reported part of it in non-current assets, 2/3 of the related future income tax liability in 2017 and 1/2 of the related future income tax liability in 2018 would have to be reported as long-term.

Balance sheet 2017

Current assets:

Future tax asset ($20,400 – $14,040)            $6,360

Non-current liabilities:

Future tax liability                            82,500

Balance sheet 2018

Current liability:

Future tax liability                             $9,360

Non-current liabilities:

Future tax liability                             77,550

Under PE GAAP, future tax assets and future tax liabilities are segregated into current and non-current categories. The classification of an individual future tax liability or asset as current or non-current is determined by the classification of the asset or liability underlying the specific temporary difference.

(e)

Income Statement – 2017
Income from continuing operations before income taxes					$850,000
Income taxes
Current income taxes			$198,735
Future income taxes			58,590		257,325
Income from continuing operations					592,675
Discontinued operations
Gain on disposal of operations			18,800
Less applicable taxes			5,640		13,160
Net income					$605,835

Income Statement – 2018
Income before income taxes					$525,000
Income taxes
Current income taxes			$ 148,980
Future income taxes			10,770		159,750
Net income					$365,250