Chapter 19: Q1IFRS (page 1114)
Where can authoritative IFRS related to the accounting for taxes be found?
Authoritative IFRS related to income tax found in IAS 12.
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Rode Inc. incurred a net operating loss of \(500,000 in 2017. Combined income for 2015 and 2016 was \)350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward. Rode expects to return to profitability in 2018.
Kleckner Company started operations in 2013. Although it has grown steadily, the company reported accumulatedoperating losses of \(450,000 in its first four years in business. In the most recent year (2017), Kleckner appears to haveturned the corner and reported modest taxable income of \)30,000. In addition to a deferred tax asset related to its net operatingloss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerateddepreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of thedeferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accountingconsequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognitionof its deferred tax asset.
Instructions
Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/).(Click on the IFRS tab and then register for freeeIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser torespond to the following questions. (Provide paragraph citations.)
(a)Briefl y explain to Kleckner management the importance of future taxable income as it relates to the recognition ofdeferred tax assets.
(b)What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?
(c)What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a taxplanningstrategy in evaluating its deferred tax asset?
Wise Company began operations at the beginning of 2018. The following information pertains to this company. 1. Pretax financial income for 2018 is \(100,000. 2. The tax rate enacted for 2018 and future years is 40%. 3. Differences between the 2018 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to \)7,000. Warranty deductions per the tax return amount to \(2,000. (b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to \)92,000. Gross profit on construction contracts for tax purposes amounts to \(67,000. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to \)60,000. Depreciation of these assets amounts to \(80,000 for the tax return. (d) A \)3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,500. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) Instructions (a) Compute taxable income for 2018. (b) Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability. (c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018. (d) Draft the income tax expense section of the income statement, beginning with “Income before income taxes.”
(Explain Future Taxable and Deductible Amounts, How Carryback and Carryforward Affects Deferred Taxes) Maria Rodriquez and Lynette Kingston are discussing accounting for income taxes. They are currently studying a schedule of taxable and deductible amounts that will arise in the future as a result of existing temporary differences. The schedule is as follows.
| Future Years | |||||
2017 | 2018 | 2019 | 2020 | 2021 | |
Taxable income | \(850,000 | ||||
Taxable amounts | \)375,000 | \(375,000 | \)375,000 | $375,000 | |
Deductible amounts | (2,400,000) | ||||
Enacted tax rate | 50% | 45% | 40% | 35% | 30% |
Instructions
Describe the procedure(s) involved in classifying deferred tax amounts on the statement of financial position under IFRS.
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