Question

For the year ended December 31, 2020, Laris Ltd. reported income before income taxes of $200,000. Prior to 2020 taxable income and accounting income was the same each year.

In 2020, Laris Ltd. paid $120,000 for advertising; of this amount, $40,000 was expensed in 2020. The remaining $80,000 was treated as a prepaid expense for accounting purposes and would be expensed equally over the 2021-2022 period. The full $120,000 was deductible in 2020.

The company paid $30,000 in 2020 for membership in a local golf club (which was not deductible for tax purposes).

In 2020 Laris Ltd. began offering a 1-year warranty on all merchandise sold. Warranty expenses for 2020 were $25,000, of which $20,000 was actually repairs for 2020 and the remaining $5,000 was estimated repairs to be completed in 2021.

Meal and entertainment expenses totalled $40,000 in 2020, only half of which were deductible for income tax purposes.

Depreciation expense for 2020 was $100,000. Capital Cost Allowance (CCA) claimed for the year was $130,000. Depreciation and CCA relate to an asset that was purchased on January 1, 2020 for $500,000.

Laris was subject to a 25% income tax rate for 2020. Laris follows IFRS.

Required:

1. Calculate taxable income and taxes payable for 2020.

2. Prepare the journal entries to record 2020 income taxes (current and deferred).

Answer 1

As per the information provided the deferred tax liability or deferred tax asset is Nil before December 31, 2020
	Amount($)
Income as per the books of accounts	200000		Calculation of deferred tax:
Add: Advertising expenses in books	40000
Add: Membership fee paid which is not			Advertisement expense difference	80000
deductable	30000		Depreciation expense difference	30000
Add: Warranty expenses not deductable in				110000
2020	5000		Less: Warranty expenses claimed in
Add:Meal and entertainment expenses			future years	5000
not deductable	20000		Temporary difference	105000
Add: Depreciation	100000		Deferred tax liability	26250
	395000
Less: Depreciation as per income tax act	130000
Less: Advertisement expenses deductable	120000
	250000
Taxable Income	145000
Tax @25%	36250
1. Taxable Income is $ 145000 and taxes payable is $ 36250
2. Journal Entry
	Debit($)	Credit($)
Income tax expense	36250
Deferred tax expense	26250
Income tax payable		36250
Deferred tax liability		26250