Sh Ltd. in its first year of operations, reported the following information:
a) Loss (accounting loss) before tax for the year was $900,000 and the tax rate was 38%;
b) Depreciation was $120,000 and CCA was $67,000. Net book value at year-end was $840,000 while UCC was $893,000;
c) The warranty program generated an estimated cost (expense) on the statement of profit and loss of $257,000 but the cash paid out was $174,000. The $83,000 warranty liability resulting from this was classified as current. On the income tax return only the amount paid is deductible.
d) Entertainment expenses of $55,000 were included in the statement of profit and loss but were half deductible for tax purposes.
e) Management believes that is likely that future taxable income will be sufficient to completely absorb this first year loss.
In the second year of operations, Sheridan Ltd. reported the following information:
a) Income before income tax for the year was $1,750,000 and the tax rate was 40%.
b) Depreciation was $120,000 and the CCA was $370,000. Net book value at year end was $720,000 while UCC was $523,000.
c) The estimated costs of the warranty program were $287,000 and the cash paid out was $242,000. The warranty liability had a balance of $128,000 and classified as current.
a) Prepare the journal entries to record income tax expense in the first and second year of operations. Record each timing difference separately. The second year tax rate (and for future years) was enacted in the first year.
b) Prepare the income statement excerpt (from net income or loss before taxes) and show the tax provision for each year.
c) Assume Sheridan uses IFRS. What is the balance of the future tax account asset or liability at the end of the second year? How would it be classified if they used ASPE?