Chen Corporation reported income before income tax for the year ended December 31, 2017 of $1,645,000.
In preparing the 2017 fi nancial statements, the accountant discovered an error that was made in 2016. The error was
that a piece of land with a cost of $40,000 had been recognized as an operating expense in error. The balance reported
as retained earnings at December 31, 2016 was $5,678,000, and the net book value of property, plant, and equipment
(excluding land) was $1,352,000 at the same date. During 2017, Chen Corporation acquired additional equipment with
a cost of $16,000.
In completing the corporate tax return for the 2017 year, the company controller noted that the 2017 depreciation
expense was $365,000, CCA claimed was $300,000, and non-deductible income tax penalties and interest of $2,500 and
golf club dues of $4,500 were incurred in the year. In addition, the accounting allowance for doubtful accounts exceeded
the tax reserve for uncollectible amounts by $20,000, although they were equal at the beginning of the year. At the end
of 2016, the company had temporary differences of $135,000, due to lower depreciation expense than CCA claimed on
the corporate tax return. The resulting future taxable amounts and the dates they were expected to reverse at December
31, 2016 were:
2017 $ 65,000
2018 $40,000
2019 $30,000
$135,000
The tax rate is 30% for all years. Chen Corporation applies IFRS.
Instructions
(a) Calculate the balance sheet Deferred Tax Account balance at December 31, 2016.
(b) Determine the effect of the prior period error on the December 31, 2016 balance sheet and prepare the journal
entry to correct the error. Assume that the 2016 income tax return is refi led.
(c) Prepare the journal entries to record income taxes for the 2017 year.
(d) Indicate how the income taxes will be reported on the fi nancial statements for 2017 by preparing the bottom portion
of the income statement beginning with “Income before income tax.” Also prepare the statement of retained
earnings for the year ended December 31, 2017, assuming no dividends were declared during the year.
Sample Solution
