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.
(c) Calculate the deferred tax balance at December 31, 2018.
(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.