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On January 1, 2010, Drugz Inc., a large pharmaceutical company, commenced busine

ID: 2581644 • Letter: O

Question

On January 1, 2010, Drugz Inc., a large pharmaceutical company, commenced business operations in Canada. The following information is available:

20X4

20X5

20X6

20X7

Reported Income (loss) before tax

$250,000

225,000

$115,000

($900,000)

Tax rate - enacted in each year

30%

30%

36%

36%

Depreciation

$400,000

$400,000

$400,000

$400,000

Capital cost allowance

$625,000

$625,000

$225,000

$225,000

Required:

Prepare journal entries to record all tax related effects for 20X6 and 20X7. All supporting calculations should be shown. Assume that the company carries back all its losses first. Further, it is judged more likely than not that the company will generate taxable incomes in future years.

HINT: Determining the taxable income would be very useful.

20X4

20X5

20X6

20X7

Reported Income (loss) before tax

$250,000

225,000

$115,000

($900,000)

Tax rate - enacted in each year

30%

30%

36%

36%

Depreciation

$400,000

$400,000

$400,000

$400,000

Capital cost allowance

$625,000

$625,000

$225,000

$225,000

Explanation / Answer

computation of taxable income for the year 2016

reported income after depreciation before tax 115000

add:depreciation 400000

Less:capital cost allowance as per income tax (225000)

Taxable income 290000

computation of deferred tax

Taxable income 290000

accounting income(reported income) (115000)

Difference   175000

computation of taxable income for the year 2017

reported income after depreciation before tax (900000)

add:depreciation 400000

Less:capital cost allowance as per income tax (225000)

taxable income (775000)

computation of deferred tax

Taxable income (775000)

accounting income(reported income) (900000)

Difference   125000

Deferred Tax Calculation Description Closing Opening Aggregate of all Deferred tax asset 0 0 Aggregate of all Deferred tax liability -45000 -90000 Net Deferred Tax Asset/(Liability) -45000 -90000 Accounting Entry Amount Amount Deferred tax liability Dr. 45000 To Deferred tax income 45000 (Being reversal of deferred tax liability during the year) Balance Sheet Closing Opening Non-current liabilities Deferred tax liabilities (Net) 45000 90000 Non-current assets Deferred tax assets (Net) Statement of Profit & Loss Current Period Previous Period Profit before tax Tax expense Current tax Deferred Tax Expense/(Income) -45000 Notes to Financial Statement Closing Opening Deferred tax asset on:- Sub Total 0 0 Deferred tax liability on:- Fixed assets 45000 90000 Sub Total 45000 90000 Net Deferred Tax Asset/(Liability) -45000 -90000
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