Christina Inc. follows IFRS and accounts for financial instruments based on IFRS 9. Christina holds a variety of investments, some of which are accounted for at fair value through net income and some of which are accounted for at fair value through other comprehensive income. On January 1, 2014, the beginning of the fiscal year, Christina's accounts and records include the following information:
Cost Market Value
Fair value through net income investments........................$60,000.................$60,000
Fair value through other comprehensive income investments.....71,000..................71,000
Market values for the FV-NI investments and FV-OCI investments at December 31, 2014, were $58,000 and $75,000, respectively. Computers that are used to track investment performance were purchased during 2014 for $10,000. For tax purposes, assume the computers are in Class 10 with a CCA rate of 30%. Depreciation expense for the year was $2,000. Christina recorded meals and entertainment expenses of $24,000 related to "wining and dining" clients. The CRA allows 50% of these costs as a deductible business expense.
Christina's income before income tax for 2014 is $110,000. This amount does not include any entries to adjust investments to market values at December 31, 2014. Christina's tax rate for 2014 is 25%, although changes enacted in tax legislation before December 31, 2014, will result in an increase in this rate to 30% for 2015 and subsequent taxation years. Assume that these rates apply to all income that is reported. There were no deferred tax accounts at January 1, 2014.
Instructions
(a) Prepare journal entries to reflect the difference between the carrying amount and market value for the above investments at Christina's year end of December 31, 2014.
(b) Explain the tax treatment that should be given to the unrealized gains or losses reported on Christina's statement of income and statement of comprehensive income.
(c) Calculate the deferred tax asset or liability balances at December 31, 2014, and indicate their classification.
(d) Calculate taxable income and income tax payable for 2014.
(e) Prepare the journal entries to record income taxes for 2014.