Pegasus Printing began operations in 20X4 and has bought equipment for use in its printing operations in each of the last three years. This equipment qualifies for an investment tax credit of 14%. Information relating to the three years is shown below:

a. Income before tax includes nondeductible advertising expenditures of $20,000 each year.
b. Equipment is depreciated straight-line over its useful life for accounting purposes, assuming zero salvage value. In each of the years, the equipment was purchased on the first day of the year. CCA claims in 20X4 were $12,000; 20X5, $135,000; and 20X6, $216,000.

Required:
1. Calculate the depreciation expense in each of the three years, net of the investment tax credit amortization.
2. Calculate taxes payable in each of the three years. Note that depreciation added back is net depreciation, as calculated in requirement 1.

3. Calculate tax expense for each year, using Canadian standards (cost reduction) to account for the investment tax credit.
4. Calculate tax expense, using the flow-through approach for all tax amounts.
5. Why is the cost reduction approach preferable?
6. Show how capital assets, and the deferred investment tax credit, would be presented on the statement of financial position at the end of 20X4.

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Income before income tax Income tax rate Equipment eligible for ITC Estimated life of equipment 20X4 $165,000 25% $40,000 10 years 20X5 $456,000 25% $689,000 13 years 20X6 $468,000 25% $450,000 12 years