CHP 18 - Corporate Taxes

Question 1

CHP 18 - Corporate Taxes

*Paper notes

Answer 1

1. Table = Tax return vs Temp differences

NBIT (just + tax return) 
Dep exp (+both)
CCA (-both) 
Non-deduc exp /non tax div inc (-both)
Any expense(+both)
Any pmt(-both)
Instalment sales(-both)

• sum of the tax return side = taxable income
• sum of the temp diff side = taxable temp diff

2) *Income tax to pay = Taxable inc * current rate
3) Table = Track temp diff

    Temp diff | Future rate| DIT asset/liab 

+open = end balance prev year *current rat
+ rate change temp diff = end balance prev year * (future rate-current rate) (JE)
= revised open * future rate
+ current year movement = current taxable temp diff *future rate (JE)
= ending balance * future rate

4) Proof

Tax cost | Carry amount | Cumulative diff (cost - cca)| (cost - dep)| (Tax cost - carry a)

5) JE

Dr CIT expense (inc tax to pay)
Dr DIT expense (tax temp diff *future rate)
Cr Inc tax payable (same as CIT exp)
Cr DIT liability (same as DIT exp)

Current year movement:
negative = Dr DIT expense Cr DIT liability
positive = Dr DIT asset Cr DIT benefit

20X2
Dr Inc Tax Receiv (inc tax to pay 20X2)
Cr CIT benefit

Dr DIT asset (current rate 20X2*taxable temp diff 20X2)
Cr Valuation Allowance

Dr DIT expense (future rate 20X1*taxable temp diff 20X2)
Cr Valuation Allowance

6) Bottom section I/S
NBIT
- (CIT + DIT expense)
= net income

7) FORMULAS
effective inc rate = CIT + DIT/ NBIT
current inc rate = CIT/NBIT
future inc rate = DIT/taxable temp diff

• only do notes if eff rate = current rate
  8) NOTE

NBIT @statutory rate = NBIT * current rate
- Record DIT expense @higher rate = taxable temp diff * future-current
+ DIT liability = prev year end balance track temp diff * future-current
-Tax effect permanent diff = non deductible*current rate
+ DIT expense = (tax temp diff20X1 *future rate20X1)
+ DIT asset = (tax temp diff20X12 *future rate20X12)
+ LCB @diff rate = [tax inc *(future 20X2-current 20X3)]

= income tax expense per financial statements

10) LCB and LCF

LCB = taxable inc loss 20X2 - Taxable inc 20X1

Dr Inc tax receiv (taxable inc 20X1*future rate 20X1)
Cr CIT benefit

LCF = taxable inc 20X3 - LCB

Dr DIT asset - LCF (taxable inc 20X2-tax inc 20X1)*future rate 20X2
Cr Valuation Allowance

20X3
Dr CIT expense (tax income 20X3 - tax inc 20X2)*current rate 20X3

11) Reversal example

1) temp diff * fraction reverse.= amt
2) amt * tax rate = DIT expense

12) DIT liab balance

1) (tax cost - carry amount)future rate = 20X1
2) (tax cost - carry amount)future rate = 20X2
3) 20X2 - 20X1 = Dr DIT exp Cr DIT liab

13) NBIT - taxable temp diff - permanent diff = taxable income