Question

For the year ended December 31, 2020, Sweet Ltd. reported income before income taxes of $190,500. Prior to 2020 taxable income and accounting income was the same each year.

In 2020, Sweet Ltd. paid $123,900 for advertising; of this amount, $41,300 was expensed in 2020. The remaining $82,600 was treated as a prepaid expense for accounting purposes and would be expensed equally over the 2021-2022 period. The full $123,900 was deductible for tax purposes in 2020.

The company paid $32,500 in 2020 for membership in a local golf club (which was not deductible for tax purposes).

In 2020 Sweet Ltd. began offering a 1-year warranty on all merchandise sold. Warranty expenses for 2020 were $25,200, of which $20,300 was actual repairs for 2020 and the remaining $4,900 was estimated repairs to be completed in 2021.

Meal and entertainment expenses totalled $43,200 in 2020, only half of which were deductible for income tax purposes.

Depreciation expense for 2020 was $104,900. Capital Cost Allowance (CCA) claimed for the year was $136,700. Depreciation and CCA relate to an asset that was purchased on January 1, 2020 for $524,500.

Sweet was subject to a 25% income tax rate for 2020. Sweet follows IFRS.

1.Calculate taxable income and taxes payable for 2020.

Taxable income $

Income taxes payable $

2. Prepare the journal entries to record 2020 income taxes (current and deferred).

(To record current tax expense.)

(To record deferred tax expense.)

Answer 1

	Calculation of Taxable Income
	Profit Before Taxes	$          190,500
	Adjustments
Less:	Advertisement deductible	$          (82,600)
Add:	Membership fee paid not deductible	$            32,500
Add:	Meal and entertainment expense	$            21,600
Add:	Depreciation as per books	$          104,900
Less:	Capital cost allowance	$       (136,700)
Add:	Estimated warranty expenses disallowed	$              4,900
	Taxable Income	$          135,100
1	Taxable Income	$          135,100
2	Income Taxes Payable(Taxable Income *25%)	$            33,775
	Accounting Income	$          190,500
3	Current Income Tax(Book Profit*25%)	$            47,625
	190500*25%
4	Deferred Tax(Taxable Income- Profit as per books)*25%	$          (13,850)
	(135100-190500)*25%
	Journal Entries
1	Profit & Loss A/c------------------------------Dr.                              To , Provision for Income Tax(Current Tax) (Being provision created for current tax at accounting income)	$            47,625	$ 47,625
2	Profit & Loss A/c-------------------Dr.                  To, Deferred Tax Liability A/c (Being deferred tax liability created @ 25% )	$            13,850	$ 13,850