Chapter 18

Question 1
Assume that BT Corporation reports accounting income of $200,000 in each of the years 2020,
2021, and 2022 and has multiple differences between accounting income and taxable income.
Assume also that the company is subject to a 30% tax rate in each year, and has the following
differences between income reported on the financial statements and taxable income:
• Revenue of $18,000 is recognized in 2020 for financial reporting purposes. The
customer pays $1,000 per month starting Jan 1, 2021.
• Warranty worth $30,000 was provided on sales and recognized as expense in 2020.
Actual warranty work was $20,000 in 2021 and $10,000 in 2022
• A premium of $5,000 is paid in each of 2021 and 2022 for life insurance on key officers.
•
Required:
1. Which of the items listed are temporary and which are permanent differences for
BT Corp.?

Revenue of $18,000 is recognized

Warranty worth $30,000 was

A premium of $5,000 is paid in

2. Provide a reconciliation of BT's accounting income to its taxable income for each of
2020, 2021, and 2022
2020 2021 2022
Accounting Income
Adjustments:

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Taxable Income

3. Record the journal entries related to taxes on Dec.31, 2020, using

4. Prepare related journal entries for 2021 and 2022

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5. Prepare partial Income statement for the three years

2020 2021 2022

Question 2
• Nilson Inc. had accounting income of $156,000 in 2020.
• Included in the calculation of that amount is the CEO's life insurance expense of $5,000,
which is not deductible for tax purposes.
• In addition, the undepreciated capital cost (UCC) for tax purposes is $14,000 lower than
the net carrying amount of the property, plant, and equipment, although the amounts were
equal at the beginning of the year.
Required:
Prepare Nilson's journal entry to record 2020 taxes, assuming IFRS and a tax rate of 25%.

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Question 3
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 2020 and 2021 taxable income and current tax expense.

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 2020 2021

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

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Question 4
• Assume that on December 30, 2021, a new income tax rate is enacted that lowers the
corporate rate from 30% to 25%, effective January 1, 2022.
• If Rostel Corp. has one temporary difference at the beginning of 2020 related to $3
million of excess capital cost allowance, then it would have had a Deferred Tax Liability
account at January 1, 2020
• Assume that the taxable amounts related to this difference are scheduled to increase its
taxable income equally in 2021, 2022, and 2023.
Required:
Record the required entry to record the adjustment to income tax, if the change of tax rate
occurred after the company recorded the income tax expense
Total 2021 2022 2023

Old Tax rate

New Tax rate

Effect of change

Question 5
• Powell Corporation has a taxable temporary difference related to net book value versus
UCC of $715,000 at December 31, 2020.
• This difference will reverse as follows: 2021, $53,000; 2022, $310,000; and 2023,
$352,000.
• Taxable Income in 2020 is $300,000
• Enacted tax rates are as follow

2020 2021 2022 2023

Record the tax expense current and deferred in 2020

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Question 6 -Part 1
Tax Loss Carry back

A company has taxable income for each year from 2017 to 2020. Assume there are no
temporary or permanent differences in any of the years included. In 2021, the company incurred
a tax loss they decided to carryback

Required:
a. Prepare the journal entry that Groh should prepare in 2021 regarding the loss carry
back.

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b. How should the loss carry back be reflected on company’s financial statements at
Dec.31,2021?

Part 2
Assume that the company decided to carry forward the rest of 2021 loss. Also, it is probable they
will generate sufficient taxable income in the future to absorb the loss. The future tax rate is
20%.
Required:
a. Record the required journal entry for carry forward in 2021

b. How would the loss carry forward be reflected on Company's financial statements
at Dec.31,2021?

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Part 3
Assume that in 2022 the company returns to profitability and has taxable income of $200,000
subject to a 20% tax rate.
Required:
a. Record the journal entry record income taxes for 2022

b. How would the realization of the loss carry forward be reflected on company's 2022
financial statements? Consider both IFRS and ASPE

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 c. How would your response change if company's taxable income had been less than
$150,000?

Part 4
 Assume now that the company's future profitability is uncertain and that at December 31,
2021, there is not enough evidence that there will be future taxable income to deduct
these losses against.
 The company is applying IFRS.

Required:
a. Discuss the amount of deferred tax benefit that company should record.

b. Prepare the tax-related journal entry(ies) assuming that the tax rate for future years
will be 20% per year.

Part 5
Assume it is unlikely the benefit from the $150,000 loss carryforward will be realized in the
future. The tax rate is 20%.
Record the required entries assuming the company is following ASPE

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Question 7
• Assume that Jensen Corp. has loss carry forward of $1 million at the end of its first year
of operations.
• Its tax rate is 20%
• It is more likely than not that enough taxable income will be generated in the future

Required:
a. Prepare the journal entry to record the deferred tax benefit and the change in the
deferred tax asset.

b. Assume that at the end of its second year of operations, loss carryforward remains
at $1 million but now only $750,000 meets the criterion for recognition. What
journal entry should be recorded by the company? Compare IFRS with ASPE
IFRS ASPE

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c.How would the Deferred Tax Asset and related accounts be reflected on Jensen's SFP?
Compare IRS and ASPE
IFRS ASPE

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