Investment Income or Loss …………………………. 3,750 — Refer the information for Henry Limited E18-11 Following year ended December 2017

Refer to the information for Henry Limited in E18-11. Following the year ended December 31, 2017, Henry continued to actively trade its securities investments until the end of its 2018 fiscal year, when it was forced to sell several of them at a loss, because of the need for cash for operations. By December 31, 2018, the portfolio of investments contained a single investment in shares, which was purchased in November 2018. Henry Limited had paid $42,000 for these remaining shares. At December 31, 2018, the shares’ market value was $40,000. Income before income tax for Henry was $120,000 for the year ended December 31, 2018. There are no other permanent or reversing/ timing differences in arriving at the taxable income for Henry Limited for the fiscal year ended December 31, 2018. The enacted tax rate for 2018 and future years is 30%.

In E18-11

Henry Limited had investments in securities on its statement of financial position for the first time at the end of its fiscal year ended December 31, 2017. Henry reports under IFRS and its investments in securities are to be accounted for at fair value through net income. During 2017, realized losses and gains on the trading of shares and bonds resulted in investment income, which is fully taxable in the year. Henry also accrued unrealized gains at December 31, 2017, which are not taxable until the investment securities are sold. The portfolio of trading securities had an original cost of $314,450 and a fair value on December 31, 2017 of $318,200. The entry recorded by Henry on December 31, 2017 was as follows:

FV-NI Investments …………………………………..3,750

Investment Income or Loss …………………………. 3,750

Income before income tax for Henry was $302,000 for the year ended December 31, 2017. There are no other permanent or reversing differences in arriving at the taxable income for Henry Limited for the fiscal year ended December 31, 2017. The enacted tax rate for 2017 and future years is 30%.

Instructions

(a) Prepare the necessary journal entry for Henry Limited to accrue the unrealized loss on its securities investments.

(b) Explain the tax treatment that should be given to the unrealized accrued loss that Henry Limited reported on its income statement.

(d) Calculate the current tax expense for the year ended December 31, 2018.

(e) Prepare the journal entries to record income taxes for 2018. Assume that there have been no entries to the ending balances of deferred taxes reported at December 31, 2017.

(f) Prepare the income statement for 2018, beginning with the line “Income before income tax.” (g) Provide the presentation for the statement of financial position for any resulting deferred tax accounts at December 31, 2018. Be clear on the classification you have chosen and explain your choice.

(h) Prepare the journal entries in part (e) under the assumption that, late in 2018, the income tax rate changed to 25% for 2019 and subsequent years.

(i) Repeat the balance sheet presentation in part (g) assuming Henry reports under the ASPE future/deferred income taxes method and has chosen the fair value through net income model to account for its securities investments.

SOLUTION

(a)

Unrealized Gain or Loss 2,000

FV-NI Investments 2,000

(b) As discussed in Exercise 18-11 the difference between the carrying amount ($40,000) and the tax base ($42,000) at December 31, 2018 is a temporary difference. The loss is not deductible until the investments are sold. The resulting deductible temporary difference must have the corresponding deferred tax recorded at the tax rate that Henry expects to recover on this loss in future accounting periods. In this case the enacted rate of 30% needs to be applied to arrive at the amount of any deferred taxes.

(c)

Stmt of						Deductible			Deferred
Fin Pos		Tax		Carrying		Temporary		Tax	Tax Asset
Account		Base	–	Amount	=	Difference	X	Rate	(Liability)
Invest. (FV-NI)		$42,000		$40,000		$2,000		30%	$600
Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	(1,125)
Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	$1,725

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(d)

Accounting income	$120,000
Reversing difference: Unrealized loss on Invest. (FV-NI) Reversing difference: 2017 Unrealized gain realized in 2018	2,000 3,750
Taxable income	$125,750
Current income taxes at 30%	$37,725
Current tax expense for 2018	$37,725

(e)

Current Tax Expense 37,725

Income Tax Payable 37,725

Deferred Tax Asset 600*

Deferred Tax Liability 1,125*

Deferred Tax Benefit 1,725

* Alternatively, if one statement of financial position account—a Deferred Tax Asset/Liability account—is used, a debit balance indicating an asset and a credit balance indicating a liability, the entry would be:

Deferred Tax Asset/Liability 1,725

Deferred Tax Benefit 1,725

(f) Income before income tax $120,000

Income tax expense

Current $37,725

Deferred (benefit) (1,725) 36,000

Net income $84,000

(g) Non-current assets

Deferred tax asset $600

IFRS require that all deferred tax assets and liabilities be reported as non-current items on a classified statement of financial position.

(h)

Stmt of						Deductible			Deferred
Fin Pos		Tax		Carrying		Temporary		Tax	Tax Asset
Account		Base	–	Amount	=	Difference	X	Rate	(Liability)
Invest. (FV-NI)		$42,000		$40,000		$2,000		25%	$500
Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	Balance before adjustment	(1,125)
Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	Adj. to deferred tax account, and deferred tax benefit for 2018	$1,625
Current Tax Expense		37,725
	Income Tax Payable			37,725
Deferred Tax Asset		500*
Deferred Tax Liability		1,125*
	Deferred Tax Benefit			1,625
*or Deferred Tax Asset/Liability		1,625
(i)	Current assets
			Future tax asset	$600

The classification must be current since the temporary difference relates to an asset that is classified as current on the statement of financial position.