Ayayai Corporation reported income before income tax for the year ended December 31, 2017 of $1,557,830. In preparing the 2017 financial statements, the accountant discovered an error that was made in 2016. The error was that a piece of land with a cost of $37,220 had been recognized as an operating expense in error. The balance reported as retained earnings at December 31, 2016 was $6,168,490, and the net book value of property, plant, and equipment (excluding land) was $1,305,250 at the same date. During 2017, Ayayai Corporation acquired additional equipment with a cost of $14,850.

In completing the corporate tax return for the 2017 year, the company controller noted that the 2017 depreciation expense was $398,870, CCA claimed was $283,800, and non-deductible income tax penalties and interest of $2,460 and golf club dues of $4,130 were incurred in the year. In addition, the accounting allowance for doubtful accounts exceeded the tax reserve for uncollectible amounts by $18,360, although they were equal at the beginning of the year. At the end of 2016, the company had temporary differences of $188,300, 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 - $ 115,070

2018 - $ 42,730

2019 - $30,500

______________________

Total - $188,300

*The tax rate is 30% for all years. Ayayai Corporation applies IFRS.

1- Calculate the balance sheet Deferred Tax Account balance at December 31, 2016

Deferred tax (asset or liability) ?

Account balance $___________

2 - 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 refiled. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Effect on the

Balance Sheet

Land (overstated and understated) by $_____________

Retained Earnings (overstated and understated) by $_____________

Income tax (overstated and understated) by $_____________

Date	Account Titles and Explanation

a) Dec 31, 2017 (only 2 entries)

(To correct land & retained earnings account.)

b) Dec 31, 2017 (only 2 entries)

(To recognize additional income tax payable.)

3- Prepare the journal entries to record income taxes for the 2017 year. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation

a) Dec 31, 2017 (only 2 entries)

(To record current taxes.)

b) Dec 31, 2017 (only 2 entries)

(To record deferred taxes.)

4- Indicate how the income taxes will be reported on the financial statements for 2017 by preparing the bottom portion of the income statement beginning with Income before income tax. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Ayayai Corporation

(Partial) Income Statement

5- Also prepare the statement of retained earnings for the year ended December 31, 2017, assuming no dividends were declared during the year. (List items that increase retained earnings first.)

Ayayai Corporation

Statement of Retained Earnings