Problem
You are preparing the tax section of your company's financial statements. During the year 2022, your company acquired equipment that cost $1.8 million. The beginning balance shows a deferred tax asset of $6,000 related to equipment. The equipment is being depreciated over nine years for financial reporting purposes and is a Class 8 - 20% for tax purposes with half in year of acquisition. Depreciation expense was $200,000 for accounting purposes for 2022. Income before tax for 2023was $275,000. Your company follows the ASPE future/deferred income taxes method.
The following items caused the only differences between accounting income before income tax and taxable income in 2023.
A. Meals and entertainment expenses (only 50% deductible for tax) were $22,000 for 2023.
B. The company paid your annual golf membership of $6,800.
C. Dividends received from non taxable Canadian corporations were $8,500
D. In 2023, the company paid rent of $150,000. $50,000 related to 2023, and $50,000 relates to each of 2024 and 2025. Rent is deductible when paid for tax purposes.
E. The company accrued warranty expenses of $25,000. Cash payments related to warranties were $11,150.
F. Depreciation expense was $200,000 and CCA was $324,000 for 2023. There were no additions or disposals during the year.
Income tax rates have not changed over the past five years.
Task
I. Calculate the balance in the Deferred Tax Asset or Liability account at December 31, 2023.
II. Calculate income tax payable for 2023.
III. Prepare the journal entries to record income taxes for 2023.
IV. Prepare the income tax expense section of the income statement for 2023, beginning with the line "Income before income tax."
V. Indicate how deferred taxes should be presented on the December 31, 2023 balance sheet.
VI. How would your response for parts a to e change if your company reported under IFRS?