E18.10 (LO 2, 3, 4, 5) (Reversing and Permanent Differences, Future Taxable Amount, No Beginning Deferred Taxes) Christina Inc. follows IFRS. 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, 2020, 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, 2020, were $58,000 and $75,000, respectively. Computers that are used to track investment performance were purchased during 2020 for $10,000. For tax purposes, assume the computers are in Class 10 with a CCA rate of 30% (assume the Accelerated Investment Incentive applies for these computers). 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 2020 is $110,000. This amount does not include any entries to adjust investments to market values at December 31, 2020. Christina's tax rate for 2020 is 25%, although changes enacted in tax legislation before December 31, 2020, will result in an increase in this rate to 30% for 2021 and subsequent taxation years. Assume that these rates apply to all income that is reported. There were no deferred tax accounts at January 1, 2020.

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, 2020.

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, 2020, and indicate their classification.

d. Calculate taxable income and income tax payable for 2020.

e. Prepare the journal entries to record income taxes for 2020.