In 2014, the first year of its existence, RaonicLtd.'s accountant, in preparing both the income statement and the tax return, developed the following list of items creating differences between accounting and taxable income:
1. The company sells its merchandise on an instalment contract basis. In 2014,Raonic elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2014. These procedures created a $240,000 difference between book and taxable incomes for 2014. Future collections of instalment receivables are expected to result in taxable amounts of $120,000 in each of the next two years.
2. The company depreciates all of its property, plant and equipment using CCA for tax purposes and straight-line for accounting purposes. This resulted in $42,000 excess CCA over accounting depreciation. This temporary difference will reverse equally over the three year period from 2015-2017.
3. On July 1, 2014, Raonic leased part of its building to Swift Books Ltd on a two-year operating lease. The monthly rent is $30,000, and Swift paid the first year's rent in advance (July 1, 2014 to June 30, 2015). Raonic reported the entire amount on its tax return. Thisresulted in an $180,000 difference between book and taxable incomes.
4. Raonic sold $150,000 of bonds issued by the Government of Canada at a gain of $18,000, which was included as other income in its income statement. A taxable capital gain of $9,000 was reported for tax purposes.
5. In 2014, Raonic insured the lives of its chief executives. The premiums paid were $12,000 and this amount was shown as an expense on the income statement. However, this amount was not deductible for tax purposes. The company is the beneficiary.
Raonic is a publicly accountable enterprise adhering to IFRS. Their 2014 income statement showed "Income before income taxes" of $900,000. The currently enacted income tax rate (and for the foreseeable future) is 40%. Except for those items mentioned above, there are no other differences between book and taxable incomes.
Instructions
(a) Calculate the taxable income and income tax payable for 2014.
Income before income taxes: $900,000
Less: $240,000 merchandise
Add: $42,000 property, plant and equipment
Add: $180,000 lease
Less: $12,000 executive life insurance
Less: $9000 bond gain
Taxable income for 2014: $51,000
Income Tax payable: $51,000 x 40% = $20,400
(b) Prepare aschedule of any future taxable/deductible amounts at the end of 2014.
(c) Prepare a continuity schedule(s) of the future income tax asset and/orfuture income tax liability at the end of 2014.
(d) Calculate the future income tax expense (benefit) for 2014.
(e) Prepare the journal entry(ies) recording income tax expense, income tax payable, and future income taxes for 2014.
(f) Raonic adheres to IFRS. How would the income tax expense and any future income taxes be disclosed on the financial statements (i.e. the Statement of Comprehensive Income and the Statement of Financial Position)?
(g) Prepare the Effective Tax Rate Note to the 2014 financial statements.