CH 18 Select Problem Solutions

P1
(a) Basic Calculations of Capital Cost Allowance, Amounts, and Balances 2022 - 2026:
(Taxable) (C-B)
(A) CCA (B) (A – B) (C) Carrying Temporary Reversing
Year Base Rate CCA UCC Deprec. Amount Difference Difference
2022 $900,000 30% $270,000 $630,000 $75,000 $825,000 $(195,000) $(195,000)
2023 630,000 20% 126,000 504,0002 150,000 675,0001 (171,000) 24,000
2024 504,000 20% 100,800 403,200 150,000 525,000 (121,800) 49,200
2025 403,200 20% 80,640 322,560 150,000 375,000 (52,440) 69,360
2026 322,560 20% 64,512 258,048 150,000 225,000 33,048 85,488
Taxable temporary difference, Dec. 31, 2022 X tax rate = Deferred tax liability, Dec. 31, 2022
($825,000 – $630,000) X tax rate = $58,500
Tax rate = 30%
1
$900,000 – $75,000 – $150,000 = $675,000
2
$900,000 – ($900,000 X 20% X 150%) – $126,000 = $504,000
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Deductible Tax Deferred
SFP (Taxable) Rate 1
Account Tax Carrying Temporary (see Asset

Dec. 31, 2023 Base Amount Differences below) (Liability)
Property, plant, & equip. $504,0002 $675,0001 $(171,000) 30% $(51,300)
Prepaid rent (2024 expense) -0- 18,750 (18,750) 30% (5,625)
Prepaid rent (2025 expense) -0- 18,750 (18,750) 30% (5,625)
Warranty liability -0- (4,500) 4,500 30% 1,350
Deferred tax liability, December 31, 2023 (61,200)
Deferred tax liability before adjustment (58,500)
Incr. in deferred tax liability, and deferred tax expense for 2023 $(2,700)
1
$900,000 – $75,000 – $150,000 = $675,000
2
$900,000 – ($900,000 X 20% X 150%) – $126,000 = $504,000
b.
Accounting income $60,000
Permanent differences:
50% of meals expense ($12,000 X 50%) $6,000
Golf club fees 9,000 15,000
75,000
Reversing differences:
Depreciation 150,000
Capital cost allowance (126,000) 24,000
Rent paid (56,250)
Rent expense 18,750 (37,500)
Warranty expense 9,000
Warranty payments (4,500) 4,500
Taxable income $66,000
Current income taxes – 30% $19,800
2
c. Current Tax Expense ................................... 19,800

Income Tax Payable ........................... 19,800
To record current tax expense
Deferred Tax Expense ............................... 2,700

Deferred Tax Liability .......................... 2,700
To record deferred tax expense
d.
Income before income tax $60,000
Income tax
Current $19,800
Deferred 2,700 22,500
Net income $37,500
e. Statement of financial position, December 31, 2023

Long-term liabilities:
Deferred tax liability [$56,925 + ($5,625 - $1,350)] $61,200
IFRS require that all deferred tax assets and liabilities be reported as
non-current items on a classified SFP.
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is
strictly prohibited.
P5
a. Basic Calculations of Capital Cost Allowance, Depreciation and Balances:
2.1.1 (C-B)
2.1.2 (
B
(A) (A – B) (C)
) Reversing
Carrying
Year Base CCA UCC Deprec. Amount Difference
2022 $1,000,000 X 20 % X 1.5 $300,000 $ 700,000 $125,000 $875,0001 $(175,000)

2023 700,000 X 20 % 140,000 560,000 125,000 750,0002 (15,000)
1
$1,000,000 - $125,000 = $875,000
2
$1,000,000 - $125,000 - $125,000 = $750,000
(b)
2023
SFP (Taxable)
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2023 Base Amount Differences Rate (Liability)
Property, plant, & equip. $560,000 $750,000 $(190,000) 30% $(57,000)
Deferred tax liability before adjustment ($175,000 X 30%) (52,500)
Calculation of current income tax expense:
Accounting income $ 1,400,000
Permanent difference – tax exempt interest (60,000)
1,340,000
Reversing difference - [part (a)] 15,000
Taxable income on regular operations 1,325,000
Income tax expense and payable @ 30 % $ 397,500
c.
Current Tax Expense ................................... 397,500
Income Tax Payable ............................. 397,500
Deferred Tax Expense ................................. 4,500

Deferred Tax Liability ............................ 4,500
d. Income before income tax $1,400,000

Income tax expense
Current $397,500
Deferred 4,500 402,000
Net income $ 998,000
Earnings per share:

Net income $9.98
e. Net deferred tax liability at December 31, 2023.

(See part (b))
Long-term liabilities
Deferred tax liability $57,000
P 11
a.
Deductible Deferred
SFP (Taxable) Tax
Account Tax Temporary 2.1.3
Tax C Asset
a
r
r
y
i
n
g
Dec. 31, 2023 4 Amou 3 Base Differences Rate (Liability)
nt
Warranty liability -0- (3,000) $3,000 30% $900
Contract asset/liability 270,000 300,000* (30,000) 30% (9,000)
Property, plant, & equipment 220,000 240,000 (20,000) 30% (6,000)
Land not given not given 34,500** 30% 10,350
Deferred tax liability before adjustment 0
*(Construction costs $270,000 + Gross profit $30,000)

**$46,000 X 75%
b.
Net Retained
income Earnings Total
Accounting income $64,000 $(5,700) $58,300
Permanent difference:
Non-taxable dividends (1,400) (1,400)
Non-deductible fines 3,500 3,500
Non-deductible loss in land value
$46,000 X 25% 11,500 11,500
Reversing differences:
Warranties: excess of expense over
claims paid ($15,000 – $12,000) 3,000 3,000
Property, plant, and equipment: excess
of CCA over depreciation expense
($80,000 – $60,000) (20,000) (20,000)
Contract asset/liability: Excess of
reported construction profit over
completed contract method
($30,000 – $0) (30,000) (30,000)
Loss on land not deductible until future
years 34,500 _______ 34,500
Taxable income $65,100 $(5,700) $59,400
Current income taxes at 30% $19,530 $(1,710) $17,820
c.
Current Tax Expense. .......................................... 19,530
Income Tax Payable..................................... 17,820
Retained Earnings (tax effect) ...................... 1,710
Deferred Tax Expense ........................................ 3,750

Deferred Tax Liability ................................... 3,750
d.
Income statement presentation:
Income tax expense
Current $19,530
Deferred 3,750 23,280
Net income $40,720
e.
Statement of Changes in Equity -
Retained Earnings
Balance January 1, 2023 -0-
Add: Net income $40,720
Less: Financing charge $(5,700)
Less applicable tax 1,710 (3,990)
Balance December 31, 2023 $36,730
f. Statement of Financial Position

Current liabilities
Income tax payable $17,820
Long-term liabilities
Deferred tax liability 3,750
IFRS require that all deferred tax assets and liabilities be reported as
non-current items on a classified SFP.
g.
Divided by
Accounting
@ 30% Income
Accounting income $64,000 19,200 30.0%
Non-taxable dividends (1,400) (420) (0.7)%
Non-deductible fines 3,500 1,050 1.6%
Non-deductible land
writedown 11,500 3,450 5.4%
23,280 36.3%
Effective tax rate ($23,280 / $64,000) (rounded) 36.3%
The effective tax rate differs from the statutory rate in this case because
of the effect of the permanent differences of dividends, fines, and 25%
of the loss due to writedown of land.
LO 8,10 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting
P 12
a.
2022
Income Tax Receivable—2019 ............................ 6,250
($25,000 X 25%)
($60,000 X 25%)
($80,000 X 30%)
Current Tax Benefit ...................................... 45,250
To record benefit from loss carryback
Note: An acceptable alternative is to record only one Income Tax

Receivable account for the amount of $45,250.
Future Tax Asset .......................................... 13,500

Future Tax Benefit ............................... 13,500
($210,000 – $25,000 – $60,000 – $80,000 = $45,000)
($45,000 X 30% = $13,500)
To record future benefit from loss carryforward
2023
[($70,000 – $45,000) X 30%]
Future Tax Expense ..................................... 13,500

Future Tax Asset .................................. 13,500
($13,500 – $0)
To record future tax expense
2024
Income Tax Payable ($90,000 X 25%) . 22,500
b. An income tax receivable account totalling $45,250 will be reported under
current assets on the SFP at December 31, 2022. This type of receivable
is usually listed immediately above inventory in the current asset section.
This receivable is normally collectible within two months of filing the
amendment to the tax returns reflecting the carryback. A future tax asset
of $13,500 should also be classified as a non-current asset (all future tax
assets/liabilities are classified as non-current). Also, retained earnings is
increased by $58,750 ($45,250 + $13,500) as a result of the entries to
record the benefits of the loss carryback and the loss carryforward.
If Carly Inc. reports under IFRS, the deferred tax asset related to the
loss carryforward would also be classified as a non-current asset on the
SFP.
c.
2022 Income Statement
Loss before income tax $(210,000)
Income tax benefit
Current benefit due to loss carryback $45,250
Future benefit due to loss carryforward 13,500 58,750
Net loss $(151,250)
d.
Income tax expense
Current $7,500a
Future 13,500 21,000
Net income $49,000
a
[($70,000 – $45,000) X 30%]
e.
2022
($25,000 X 25%)
($60,000 X 25%)
($80,000 X 30%)
Current Tax Benefit ...................................... 45,250
Note: An acceptable alternative is to record only one Income Tax

Receivable account for the amount of $45,250.
Although its related possible income tax benefit is not recognized in the
accounts, Carly Inc. has a tax loss carryforward of $45,000, which is
required to be disclosed.
2023
[($70,000 – $45,000) X 30%]
2024
Income Tax Payable ($90,000 X 25%) . 22,500
f. 2022: entry for current taxes – no change
2022: if a valuation allowance is used, the full income tax benefit and
future tax asset related to the tax loss carryforward is recognized and
then offset by the allowance, as follows.
Future Tax Asset ......................................... 13,500

($45,000 X 30% = $13,500)
To record future benefit from loss carryforward
Future Tax Expense 13,500
Allowance to Reduce Future Tax
Asset to Expected Realizable Value 13,500
($13,500 – $0)
To bring future tax asset account to its realizable value
2023: entry for current taxes – no change
2023: because the tax loss carryforward has now been used, both the
amount in the future tax account and in its allowance account must be
removed, as follows:
Future Tax Expense .................................... 13,500

Future Tax Asset ............................... 13,500
To adjust future tax asset account
Allowance to Reduce Future Tax Asset

to Expected Realizable Value ....... 13,500
To bring future tax asset account to its realizable value
Alternatively, one entry could have been made:
Allowance to Reduce Future Tax Asset

to Expected Realizable Value ....... 13,500
Future Tax Asset ............................... 13,500
2024: No change to part (e) entry.
g.
Loss before income tax $(210,000)
Income tax benefit
Current benefit due to loss carryback 45,250
Net loss $(164,750)

Income tax expense – Current a 7,500
Net income $62,500
a
[($70,000 – $45,000) X 30%]
h. Using the valuation allowance instead of applying the reduction in value

directly does not have any impact on cash flows. The use of the contra
allowance simply permits the recording of the full benefits associated
with all future deductible amounts in the asset account. This facilitates
tracking for management purposes. It has no use for financial reporting
purposes except, perhaps, for the transparency of the information.
Readers can see the total possible benefits and the extent to which
management has judged they will not be realized.

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P1

Account Tax Carrying Temporary (see Asset

c. Current Tax Expense ................................... 19,800

Deferred Tax Expense ............................... 2,700

e. Statement of financial position, December 31, 2023

2022 $1,000,000 X 20 % X 1.5 $300,000 $ 700,000 $125,000 $875,0001 $(175,000)

Deferred Tax Expense ................................. 4,500

d. Income before income tax $1,400,000

Earnings per share:

e. Net deferred tax liability at December 31, 2023.

*(Construction costs $270,000 + Gross profit $30,000)

Deferred Tax Expense ........................................ 3,750

f. Statement of Financial Position

Effective tax rate ($23,280 / $64,000) (rounded) 36.3%

Note: An acceptable alternative is to record only one Income Tax

Future Tax Asset .......................................... 13,500

Future Tax Expense ..................................... 13,500

Note: An acceptable alternative is to record only one Income Tax

f. 2022: entry for current taxes – no change

Future Tax Asset ......................................... 13,500

2023: entry for current taxes – no change

Future Tax Expense .................................... 13,500

Allowance to Reduce Future Tax Asset

Alternatively, one entry could have been made:

Allowance to Reduce Future Tax Asset

2024: No change to part (e) entry.

2023 Income Statement

h. Using the valuation allowance instead of applying the reduction in value

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