Last year was a challenging one for Samuel's Snowboards Inc. (SSI), a large private company that manufactures snowboards and skateboards. Competition has increased in the industry and, in the skateboard segment in particular, SSI lost significant market share. The poor performance of the skateboard segment, which represented a major line of business, led to a recent decision to discontinue this segment and focus on manufacturing snowboards only.

You, CPA, are the audit senior on the SSI engagement. SSI has been a client of your firm for three years. Each year, the audit has gone smoothly. You recently met with Jackson Churchill, the chief financial officer of SSI, to review the draft financial statements for 2020. Jackson noted that sales and earnings were much lower in 2020 than had been budgeted. He expressed concern that this will surely displease the shareholders, who rely on SSI for healthy quarterly dividend payments. He explained to you that management will also be disappointed because year-end bonuses are, in part, calculated based on income from continuing operations.

It is now January 2021, and you are ready to start the year-end audit work for SSI's December 31 year end. SSI reports its financial statements in accordance with accounting standards for private enterprises (ASPE). SSI's tax rate is 20%.

Question #1

On December 1, 2020, SSI's board of directors approved the sale of the skateboard segment, as it had been underperforming for the past two years. A broker was hired that month to assist in carrying out this transaction and achieving the highest possible sales price for the assets of the segment. The skateboard segment currently has two interested buyers, and SSI expects that a deal will close by February 2021. The skateboard segment incurred a loss of $2,830,500 for the 2020 fiscal year. Of that amount, $2,250,000 was for the period up until the date the board approved the disposal of the segment, and the rest was incurred between December 1, 2020, and year end. Estimated costs to dispose of the segment are $300,000. The carrying value of current assets and all liabilities is equal to fair value. The fair value of the property, plant, and equipment of the segment is estimated to be $7,000,000, and the carrying value of property, plant, and equipment was $7,300,000 ($15,000,000 cost less $7,700,000 accumulated depreciation). Analyze this issue, explaining how the skateboard segment will be presented in the financial statements.

Question #2

SSI uses the future taxes method of accounting for income taxes. The company reports future tax expense for temporary differences arising from property, plant, and equipment; deferred development costs; and warranty liabilities.

As of December 31, 2019, a future income tax liability of $230,000 was reported for property, plant, and equipment; a $100,000 future income tax liability was reported for the deferred development costs; and a future income tax asset of $40,000 was reported related to the warranty liability. These were determined using SSI's 20% tax rate.

During 2020, the following changes occurred with respect to the temporary differences:

Capital cost allowance claimed was $30,000 greater than depreciation expense recorded for accounting.

Deferred development costs capitalized exceeded amortization of deferred development costs by $20,000.

Warranty expense was greater than warranty claims paid by $40,000.

SSI's tax rate is unchanged.

Explain how the changes will impact the future income tax assets, liabilities, and expense for the 2020 financial statements. Calculate the revised future income tax asset/liability.