Chapter 18 Solutions - Intermediate Accounting, 12th Canadian Edition (Kieso, Weygandt, Warfield, Young, PDF

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

CHAPTER 18 INCOME TAXES Learning Objectives 1. Understand the importance of income taxes from a business perspective. 2. Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. 3. Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. 4. Prepare analyses of deferred tax balances and record deferred tax expense. 5. Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. 6. Account for tax loss carryover benefits, including any note disclosures. 7. Explain why the Deferred Tax Asset account is reassessed at the statement of financial position date, and account for the deferred tax asset with and without a valuation allowance account. 8. Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation. 9. Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. 10. Apply the temporary difference approach (future income taxes method) of accounting for income taxes in a comprehensive situation.

Solutions Manual 18.1 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Ite m 1.

LO

1

B Ite T m

LO

C 6. 2,4

2.

A P 3. 2 A P 4. 2 A P 5. 2,3,4 A P 1.

2

2,3

7. 2,4 8. 3,4 9. 3,4 10. 3,4

C 8. 2,3,9,10

2.

2,3

C 9.

3.

2,3

K 10.

2,3,5,8,10 2,3,4,5 4. 2,3,4 A 11. P 2,3,4,8,9 5. 2,3,4,8 A 12. P 2,3,4 6. 2,3 K 13. 2,3,4 7. 2,3,4,8 A 14. P 2,3,4,5 1. 2,4,8 A P 2. 2,4,8,9 A P 3. 2,4,5,8 A P 4. 2,4,5,8, A 9 P

5. 2,4,5,8 6. 2,4,8,9 7. 2,4,5,8,9 8. 2,4,5,8,9

B Ite LO T m

BT

Brief Exercises A 11. 3,4 A P P A 12. 4 A P P A 13. 4,5 A P P A 14. 3,5 A P P A 15. 6 A P P Exercises A 15. 3,4,8,9 A P P A 16. 2,3,4,5 A P P A 17. 2,4,9 A P P A 18. 2,34,5,8 A P P A 19. 2,3,4,5 A P P A 20. 2,4,9 A P P A 21. 2,3,5,8,9 A P P Problems A 9. 2,4,5,8,9 A P P A 2,4,8,9 A P 10. P A 8,9,10 A P 11. P A 5,6,7,8 A P 12. P

Ite LO BT Ite m m 16.

6

A P 17. 6 A P 18. 6,7 A P 19. 6,7 A P 20. 8 A P

LO

B T

21.

8

22.

8

23.

8,9

24.

9

A P A P A P A P

22. 2,4,5, A 29. 2,4,8,9 A 8 P P 23. 4,5 A 30. 2,8,9 A P P 24. 5,6 A 31. 2,8,9 A P P 25. 5,6,7, A 32. 8,9 A P 8 P 26. 7 A P 27. 7 A P 28. 3,4,8, A 9 P 13. 2,8 A P 14. 2,4,8 A P 15. 2,5,6, A 8 P 16. 2,5,8 A P

Solutions Manual 18.2 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

1.

6

A 2. N

Intermediate Accounting, Twelfth Canadian Edition

Cases 3.

Research and Analysis 1. 2,3,6,7 A 3. 5,6,8 A 4. 5,8 A 5. N P P 2. 5,6,8 A 7 3 AN P

9

A 6. 2,3,6,7, A N 8,9 P

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

Summary of Legend: The following abbreviations will appear throughout the solutions manual file. LO BT

Difficulty:

Time: AACSB

CPA CM

Learning objective Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to complete in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

Solutions Manual 18.4 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises

Problems

1. Income taxes from a business perspective.

1

2. Difference between accounting income and taxable income, calculate taxable income.

2, 3, 4, 5, 6, 7

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 31, 32, 33

1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15

3. Taxable temporary differences, calculation of deferred/future income tax liabilities.

5, 8, 9

1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 21, 22, 30, 31

1, 2, 3, 5, 6, 7, 8, 9, 13, 14, 15

4. Deductible temporary differences, calculation of deferred/future income tax assets.

10, 11, 14

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 15, 16, 17, 18, 19, 22, 30, 31

1, 2, 3, 5, 6, 7, 8, 9, 13, 14, 15

5. Deferred/future income tax balances.

5, 6, 7, 8, 9, 11, 12, 13

4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 22, 23, 30, 31

1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15, 16

6. Multiple tax rates, tax rate changes.

13, 14

9, 10, 14, 18, 19, 21, 22, 23, 24, 25, 26, 27

2, 3, 4, 14, 16

7. Loss carrybacks.

15, 16, 17, 18, 19

24, 25, 26, 27

12

Solutions Manual 18.5 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Topics

Brief Exercises

Exercises

Problems 12, 15

8. Loss carryforwards.

16, 17, 18, 19

24, 25, 26, 27

9. Valuation of deferred/future tax asset.

18, 19

27, 28, 29

10. Presentation and disclosure of income taxes.

20, 21, 22, 23

5, 7, 8, 9, 11, 15, 21, 22, 31, 32, 33, 34

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15

11. Differences between IFRS and ASPE.

23, 24

7, 8, 9, 11, 15, 20, 21, 22, 27, 31, 32, 33, 34

1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 14

7, 8, 9, 22, 27

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16

12 Temporary difference approach in a comprehensive situation

Please note: The simplifying assumption is made that unless told that a company follows ASPE, all companies in the end-of-chapter brief exercises, exercises, and problems follow IFRS and use the term “deferred” rather than “future” for the tax-related accounts.

Solutions Manual 18.6 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE

Level of Difficulty

Time (minutes)

Item

Description

E18.1

Terminology, relationships, calculations, entries

Moderate

10-15

E18.2

Identifying reversing and permanent differences Identifying reversing and permanent differences; deferred tax liabilities and deferred tax assets One reversing difference through three years, one rate Intraperiod tax allocation–other comprehensive income Identifying reversing or permanent differences and showing effects Two reversing differences, future taxable and deductible amounts, no beginning deferred taxes, one tax rate Two reversing differences, future taxable and deductible amounts, beginning deferred taxes, one tax rate Two reversing differences, future taxable and deductible amounts, beginning deferred taxes, change in tax rate Reversing and permanent differences, future taxable amount, no beginning deferred taxes One reversing difference, future taxable amounts, one tax rate, no beginning deferred taxes, One reversing difference, future taxable amounts, one tax rate, no beginning deferred taxes One reversing difference, future taxable amounts, one tax rate, beginning deferred taxes One temporary difference, future taxable amounts, no beginning deferred taxes, change in rate Permanent and reversing differences, calculate taxable income, entry for taxes One reversing difference, future deductible amounts, one tax rate, no beginning deferred taxes

Moderate

20-25

Simple

20-25

Moderate

15-20

Moderate

15-20

Simple

10-15

Moderate

20-25

Moderate

20-25

Moderate

20-25

Simple

20-25

Simple

20-25

Simple

15-20

Simple

15-20

Simple

15-20

Simple

15-20

Simple

15-20

E18.3

E18.4 E18.5 E18.6 E18.7

E18.8 E18.9

E18.10 E18.11

E18.12 E18.13 E18.14

E18.15 E18.16

Solutions Manual 18.7 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Level of Difficulty

Time (minutes)

Item

Description

E18.17

One reversing difference, future deductible Simple amounts, one tax rate, beginning deferred taxes One temporary difference, future taxable Moderate amount becoming future deductible amount, one tax rate, change in rate One reversing difference, future deductible Moderate amounts, no beginning deferred taxes, change in rate Depreciation, reversing difference over five Moderate years, determining taxable income, taxes payable method Deferred tax liability, change in tax rate Complex Two differences, no beginning deferred Simple taxes, multiple rates One difference, multiple rates, beginning Simple deferred taxes, change in rates Loss carryback and carryforward Moderate Carryback and carryforward of tax loss Simple Loss carryback and carryforward Complex Loss carryback and carryforward using a Moderate valuation allowance Deferred tax asset–different amounts to be Moderate realized Deferred tax asset–different amounts to be Moderate realized; valuation allowance Three differences, classification of deferred Simple taxes. Intraperiod tax allocation–discontinued Moderate operations Taxes payable method Simple Taxes payable method Simple Taxes payable method Moderate

E18.18

E18.19 E18.20 E18.21 E18.22 E18.23 E18.24 E18.25 E18.26 E18.27 E18.28 E18.29 E18.30 E18.31 E18.32 E18.33 E18.34

15-20 20-25

20-25 40-45 15-20 15-20 20-25 20-25 15-20 30-35 30-35 20-25 10-15 10-15 25-30 10-15 10-15 15-20

Solutions Manual 18.8 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item

Description

P18.1

Three temporary differences and two permanent differences, opening balance, statement disclosure Six differences, three years, two tax rates, income and SFP reporting Four differences, one rate, reconciliation of balances and comparative statement disclosure, reconcile tax rate One temporary difference, tracked for four years, one permanent difference, change in rate Second year of depreciation difference, two differences, single rate, earnings per share Several differences, two years, reversing differences, one rate, discontinued operations and financial statements Two differences, two years, reversing differences, two assumptions, several rates and financial statements Three differences, several rates, two years and statement disclosure Two differences, two rates, future income expected Two differences, two years, calculate taxable income and pre-tax accounting income Five differences, one year, income and retained earnings reporting, and effective tax rate Losses carryback and carryforward expected to be realized and not expected to be realized Prior period error correction, recovery of prior year taxes, income statement and retained earnings statements disclosure One reversing difference, change in tax rate, calculation of effective tax rate, all entries and balance sheet presentation under ASPE and IFRS

P18.2 P18.3

P18.4 P18.5 P18.6 P18.7 P18.8 P18.9 P18.10 P18.11

P18.12 P18.13 P18.14

Level of Difficulty

Time (minutes)

Moderate

30-35

Complex

45-50

Complex

50-60

Complex

50-60

Moderate

40-45

Complex

50-60

Complex

40-45

Complex

50-60

Moderate

25-30

Complex

40-50

Complex

50-60

Moderate

35-40

Moderate

35-40

Moderate

50-60

Solutions Manual 18.9 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item P18.15

P18.16

Level of Description Difficulty Loss carryback with timing and permanent Complex differences and a tax rate change. The tax benefit for only half of the loss carryforward can be recognized. Journal entries and tax reconciliation note required Changing tax rates, fair value accounting Moderate of investment properties and revaluation method including their impact on deferred tax balances

Time (minutes) 60-75

20-25

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18.1 (a)

Higher income tax expense results in lower profits.

(b)

Higher income taxes paid decreases cash flow from operations.

(c)

Considering only the effect of income taxes, Faber should register its company in Eastern Europe, where the company would be subject to a lower corporate income tax rate.

LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 18.2 2020 taxable income Tax rate 12/31/2020 income tax payable

$184,000 X 25% $ 46,000

LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.11 Chapter 18 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

BRIEF EXERCISE 18.3 Accounting income Permanent difference – insurance expense

$156,000 5,000

Reversing difference: CCA > Depreciation Taxable income Current income taxes at 25%

161,000 (14,000) $147,000 $ 36,750

SFP Account

(Taxable) Temporary Difference

PP & E

(change in) ($14,000)*

Tax X Rate

25%

Deferred Tax (Liability) (change in) ($3,500)

*Carrying amount and tax base are not given in the exercise; only the net change in the temporary difference is given. Current Tax Expense.......................................... 36,750 Income Tax Payable.................................... To record current tax expense Deferred Tax Expense......................................... Deferred Tax Liability.................................. To record deferred tax expense

36,750

3,500 3,500

LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

BRIEF EXERCISE 18.4 (a) X(.25) = $200,000 taxes due for 2020 X = $200,000 ÷ .25 X = $800,000 taxable income for 2020 (b) Taxable income [from part (a)]................................. $800,000 Excess of CCA over depreciation............................ 160,000 Dividend income........................................................ 23,000 Unearned rent............................................................ (60,000) Accounting income for 2020............................. $923,000 LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 18.5 The $40,000 reversing difference that occurs in the first fiscal year of Mazur Corp. results in a taxable temporary difference at December 31, 2020. The carrying amount is greater than the UCC (tax base) by $40,000. $40,000 X 30% tax rate = $12,000 deferred tax liability. Stmt of Fin Pos Account

(Taxable) Temporary Difference

PP & E

($40,000)*

Tax X Rate 30%

Deferred Tax (Liability) ($12,000)

*Carrying amount and tax base are not given in the exercise; only the net difference is provided. LO 2,3,4 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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