Intermediate Accounting 9th Canadian Edition - Chapt

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E18-1: Identifying Reversing or Permanent Difference and Showing Effects

Instructions:

a) Match each item on the following list to the number below that best describes it.

i. Reversing Entry that results in future deductible amounts and, therefore will usually give rise to a future income tax asset.

ii. Reversing Entry that results in future taxable amounts and, therefore will usually give rise to a future income tax liability.

iii. A permanent Difference

b) Indicate if the amounts that are involved in the current year will be added to or deducted from accounting income to arrive at taxable income.

1. Financial reporting purposes: straight line depreciation method is used for plant assets that have a useful life of 10 years; for Tax Purposes: CCA declining balance method is used with a rate of 20%.

i. Reversing Entry that results in future taxable amounts and, therefore will usually give rise to a future income tax liability.

* Asset’s cost is deducted faster for tax purposes than it is expensed for financial reporting purposes because CCA reduces the asset value faster that straight-line. Taxable income in the early years of the asset’s life is lower than the accounting income.

* Amount will be deducted from accounting income to arrive at taxable income in the current year in order to reduce accounting income to the same level as the accounting income.

2. Landlord collects rents in advance. Rents are taxable in the period when they are received.

i. Reversing Entry that results in future deductible amounts and, therefore will usually give rise to a future income tax asset.

* The rent is taxable in the period in which it is received and because it cannot be taxed twice, as the revenue is actually earned, it is deducted from accounting income to arrive at taxable income.

* Amount will be added to accounting income to arrive at taxable income in the current year.

E18-1: Identifying Reversing or Permanent Difference and Showing Effects

3. Non-deductible expenses are incurred in obtaining income that is exempt from taxes.

i. A permanent Difference

* There is no addition or deduction for permanent differences.

4. Cost of guarantees and warranties are estimated and accrued for financial reporting purposes

i. Reversing Entry that results in future deductible amounts and, therefore will usually give rise to a future income tax.

* These costs are only deductible when the costs are actually incurred * This results in a addition to accounting income to arrive @ taxable income in the current year, because the expense is not yet deductible.

5. Instalment sales are accounted for by the accrual method for financial reporting purposes and the cash basis for tax purposes.

i. Reversing Entry that results in future taxable amounts and, therefore will usually give rise to a future income tax liability.

* Although the Instalment sales are recognized in accounting income when the sale takes place, they are not actually taxable until the instalment payment is received. * There is a reduction to the accounting

6. For some assets, straight line depreciation is used for both financial and tax purposes but the assets lives are shorter for tax purposes.

i. Reversing Entry that results in future taxable amounts and, therefore will usually give rise to a future income tax liability.

* Asset’s cost is deducted faster for tax purposes than it is expensed for financial reporting purposes because the life is shorter for tax purposes. Taxable income in the early years of the asset’s life is lower than the accounting income.

* Amount will be deducted from accounting income to arrive at taxable income in the current year in order to reduce accounting income to the same level as the accounting income.

E18-1: Identifying Reversing or Permanent Difference and Showing Effects

7. Pension...
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