# Boomer Corp. — Income Taxes (20X8) ## 1. Classification of Differences Below is an analysis of whether each difference is **permanent** or **temporary**: | Item | Description | Permanent/Temporary | Explanation | |------|-------------|--------------------|-------------| | **a** | Golf club dues expense not tax deductible | Permanent | Never deductible for tax; never reverses. | | **b** | Investment revenue not taxable | Permanent | Never taxed; never reverses. | | **c** | Estimated warranty expense accrued, tax deductible when paid | Temporary | Timing difference; deductible in future when paid. | | **d** | Gain on disposal of land taxable when collected | Temporary | Timing difference; taxable in future when collected. | | **e** | Development costs expensed for tax, depreciated for accounting | Temporary | Timing difference; reverses over useful life for accounting. | | **f** | Equipment: accounting depreciation ≠ CCA claimed | Temporary | Timing difference; reverses as depreciation/CCA converge. | **Summary:** - **Permanent Differences:** a, b - **Temporary Differences:** c, d, e, f --- ## 2. Journal Entry for Income Tax (End of 20X8) ### Step 1: Calculate Taxable Income **Start with:** - Accounting earnings: **$1,200,000** **Adjust for Permanent Differences:** - **Add back non-deductible expense (a):** +$10,000 - **Subtract non-taxable revenue (b):** -$325,000 **Adjust for Temporary Differences:** | Item | Adjustment | Reason | |------|------------|--------| | **c** | +$70,000 | Warranty expense not deductible yet for tax (add back) | | **d** | +$240,000 | Gain not taxable until collected (subtract) | | **e** | -$50,000 | Development cost deducted for tax (subtract) | | **f** | -$50,000 | Tax depreciation ($150,000) > book depreciation ($100,000): extra $50,000 deduction for tax | **Taxable Income Calculation:** \[ \begin{align*} \text{Accounting Income} & = \$1,200,000 \\ \text{Add: Non-deductible golf dues} & = +\$10,000 \\ \text{Less: Non-taxable investment revenue} & = -\$325,000 \\ \text{Add: Warranty expense (not deductible yet)} & = +\$70,000 \\ \text{Less: Gain on land (not taxable yet)} & = -\$240,000 \\ \text{Less: Development costs (deducted for tax)} & = -\$50,000 \\ \text{Less: Excess CCA over book depreciation} & = -\$50,000 \\ \hline \text{Taxable Income} & = \$615,000 \\ \end{align*} \] ### Step 2: Calculate Taxes - **Current income tax expense:** \( \$615,000 \times 38\% = \$233,700 \) - **Accounting income tax expense:** \( \$1,200,000 \times 38\% = \$456,000 \) - **Deferred tax expense:** \( \$456,000 - \$233,700 = \$222,300 \) ### Step 3: Journal Entry ```plaintext Dr Income tax expense $456,000 Cr Income taxes payable $233,700 Cr Deferred tax liability $222,300 ``` --- ## 3. Statement Presentation ### (a) Statement of Financial Position (Balance Sheet) - **Deferred tax liability**: $222,300 (net balance of all temporary differences) - **Income taxes payable**: $233,700 ### (b) Statement of Profit and Loss (Income Statement) - **Income tax expense**: $456,000 --- ### **Summary Table** | Statement | Amount | |-----------------------------|----------| | Deferred tax liability | $222,300 | | Income taxes payable | $233,700 | | Income tax expense (P&L) | $456,000 | --- ### **Key Points** - Permanent differences do **not** create deferred tax. - Temporary differences create deferred tax assets/liabilities. - Income tax expense on the income statement is based on accounting profit, not taxable profit. --- **Note:** - All calculations assume no prior deferred tax balances. - Deferred tax here is a net liability, as future taxable amounts exceed deductible amounts.