KureAll Pharmaceutical Industries, Inc

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KureAll Pharmaceutical Industries, Inc., [KPI]  manufactures a wide range of medical products which are distributed world wide. It reported an accounting income before income taxes of $1,875,000 for the year ended December 31, 2018. The following additional information is provided to you.

?  The carrying amount [net book value] of its capital assets as at January 1, 2018, was $3,768,000, and at January 1, 2019, was $3,828,000. Depreciation expense in 2018 on capital assets was $861,000. Similarly, the undepreciated capital cost balance (UCC tax basis) was $2,568,000 on January 1, 2018 and $2,304,000 on January 1, 2019. There were no asset disposals in 2018.

?  In 2017, a gel mixer was sold and a profit of $78,000 was recognized in accounting income. Because the sale was made with delayed payment terms, the profit is taxable only as KPI receives payments from the purchaser. A $6,000 profit on the down payment was received in 2017, with the balance expected to be received in equal amounts over the following three years.

?  Life insurance premiums on the life of the company's chief executive officer were paid by the company and amounted to $36,000. This expense is not deductible for tax purposes. 

?  Dividends of $15,000 received during the year from a Canadian corporation were non-taxable.

?  KPI had a balance of $237,000 as warranty liability on January 1, 2018 and $168,000 on January 1, 2019. Warranty claims paid out during 2018 amounted to $135,000.

?  Golf club membership dues paid for company executives amounted to $60,000. This expense is not deductible for tax purposes.

?  In 2017, the government changed the income tax rate from 35% to 40%, effective January 1, 2018.

 

 

 

   Determine the net change to be made to the Deferred Tax Asset/Liability account for the adjustment of the capital cost allowance in 2018.    

Select one:

a.

A DEBIT to Deferred Tax Asset/Liability, $3,753,000

b.

A CREDIT to Deferred Tax Asset/Liability $3,753,000

c.

A CREDIT to Deferred Tax Asset/Liability, $189,600

d.

A DEBIT to Deferred Tax Asset/Liability, $324,000

e.

A CREDIT to Deferred Tax Asset/Liability, $129,600

 

 

 

   Determine the change to be made to the Deferred Tax Asset/Liability account for the net adjustment of warranty expenses/claims in 2018.    

Select one:

a.

A CREDIT to Deferred Tax Asset/Liability, $15,750

b.

A CREDIT to Deferred Tax Asset/Liability $27,600

c.

A CREDIT to Deferred Tax Asset/Liability, $189,600

d.

A CREDIT to Deferred Tax Asset/Liability, $58,800

e.

A DEBIT to Deferred Tax Asset/Liability, $94,800

 

 

What change, other than for the depreciation claimed, occurred to the company's total capital assets during 2018? 

Select one:

a.

A net increase probably due to the acquisition of additional assets costing $921,000 during the year

b.

A net increase of $60,000 probably due to the sale of assets for cash during the year

c.

A net increase probably due to the acquisition of additional assets costing $60,000 during the year

d.

A net increase probably due to the sale of assets for cash with a profit of $60,000 during the year

e.

 

 

 Determine the net effect of adjusting all the items causing permanent differences between taxable and accounting income.

Select one:

a.

The current income tax expense for 2018 would increase by $32,400

b.

The taxable income would increase by $81,000 over accounting income

c.

The Deferred Tax Assets/Liabilities would not change

d.

All of the above

e.

 

 

  The entry required to be made to the Deferred Tax Asset/Liability account for the net adjustment of the installment sales in 2019 would be

Select one:

a.

A CREDIT to Deferred Tax Asset/Liability $24,150

b.

A DEBIT to Deferred Tax Asset/Liability, $24,000

c.

A DEBIT to Deferred Tax Asset/Liability $8,400

d.

A DEBIT to Deferred Tax Asset/Liability, $9,600

e.

A CREDIT to Deferred Tax Asset/Liability $72,000

 

 

[40]   ASSUME that KPI decides to make the following entry on December 31, 2018.

    DR  Current income tax expense     $634,800

    CR    Income tax payable                     $634,800

This would imply that

Select one:

a.

the taxable income for 2018 was equal to the accounting income

b.

the income tax expense reported by KPI on its income statement would be $750,000

c.

the taxable income for 2018 was determined to be $1,587,000

d.

All of the above

e.

NONE

 

[41]   Now ASSUME for this question only that the tax rate change was announced in 2018 and effective January 1, 2018.  The journal entry which KPI would make at the end of 2018 to record the net effect in the Deferred Tax Asset/Liability account for the tax rate change in 2018 would be

Select one:

a.

DR Deferred Income Tax Expense/Benefit, $51,750; CR Deferred Tax Asset/Liability, $51,750

b.

DR Deferred Tax Asset/Liability, $54,000; CR Deferred Income Tax Expense/Benefit, $54,000

c.

DR Current Income Tax Expense, $54,000; CR Income Tax Payable, $54,000

d.

DR Deferred Income Tax Expense/Benefit, $70,800; CR Deferred Tax Asset/Liability, $70,800

e.

none of the above

 

Question text

 

ASSUME for Questions [42] and [43] only that on December 31, 2019, KPI carried balances in the following three accounts as stated below:

Capital Assets     $2,304,000 [UCC Balance $3,828,000]; reversible over the next 10 years;

Warranty Liability   $237,000 reversible when the liability is settled.

Installment Sales    $ 48,000 reversible equally over the next two years.

  If KPI operates under ASPE, how would the Deferred Tax Asset/Liability be reported?

Select one:

a.

$609,600 as a Long Term Liability; $94,800 as a Current Asset; and $19,200 as a Current Liability

b.

$609,600 as a Long Term Asset; $94,800 as a Current Asset; and $19,200 as a Current Liability

c.

$600,000 as a Long Term Asset; $85,200 as a Current Asset

d.

$534,000 as a Long Term Liability

e.

Cannot be determined from the given data

 

 

[43]   If KPI operates under IFRS, how would the Deferred Tax Asset/Liability be reported?

Select one:

a.

$609,600 as a Long Term Liability; $94,800 as a Current Asset; and $19,200 as a Current Liability

b.

$609,600 as a Long Term Asset; $94,800 as a Current Asset; and $19,200 as a Current Liability

c.

$609,600 as a Long Term Liability; $75,600 as a Current Asset

d.

$685,200 as a Long Term Asset

e.

Cannot be determined from the given data