The following information relates to Shirley Corporation's transactions during 2017, its first year of operations. 1. Income

Question:

The following information relates to Shirley Corporation's transactions during 2017, its first year of operations.

1. Income before income tax on the income statement for 2017 was $64,000.

2. Income before income tax ($64,000 above) is net of loss due to the writedown of land of $46,000.

3. Shirley reported a tax-deductible financing charge of $5,700 on its 2017 statement of retained earnings. The charge is for interest on a financial instrument that is legally debt, but in substance is equity for financial reporting purposes.

4. The tax rate enacted for 2017 and future years is 30%. Because this was Shirley Corporation's first taxation year, no instalments on account of income taxes were required or paid by Shirley.

5. Differences between the 2017 GAAP amounts and their treatment for tax purposes were as follows:

(a) Warranty expense accrued for financial reporting purposes amounted to $15,000. Warranty payments deducted for taxes amounted to $12,000. Warranty liabilities were classified as current on the statement of financial position.

(b) Of the loss on writedown of land of $46,000, 25% will never be tax deductible. The remaining 75% will be deductible for tax purposes evenly over the years from 2018 to 2020. The loss relates to the loss in value of company land due to contamination.

(c) Gross profit on construction contracts using the percentage-of-completion method for book purposes amounted to $30,000. For tax purposes, gross profit on construction contracts amounted to $0 because the completed-contract method is used and no contracts were completed during the year. Construction costs amounted to $270,000 during the year.

(d) Depreciation of property, plant, and equipment for financial reporting purposes amounted to $60,000. CCA charged on the tax return amounted to $80,000. The related property, plant, and equipment cost $300,000 when it was acquired early in 2017.

(e) A $3,500 fine paid for a violation of pollution laws was deducted in calculating accounting income.

(f) Dividend revenue earned on an investment was tax exempt and amounted to $1,400.

6. Taxable income is expected for the next few years.

Shirley Corporation follows IFRS.

Instructions

(a) Calculate Shirley Corporation's deferred tax asset or liability at December 31, 2017.

(b) Calculate the taxable income for 2017. Show all details of the adjustments to accounting income to arrive at taxable income.

(d) Prepare a partial 2017 income statement, beginning with "Income before income tax."

(e) Prepare a statement of retained earnings for the year ended December 31, 2017, assuming no dividends were declared in the year.

(f) Show how the balance of all the tax asset or liability accounts will be reported on the December 31, 2017 statement of financial position.

(g) Calculate the effective rate of tax. Provide a reconciliation and explanation of why this differs from the statutory rate of 30%. Begin the reconciliation with the statutory rate.

(h) How would your response to part (f) change if Shirley Corporation followed ASPE?

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