Under the temporary difference approach, the tax rates used for deferred tax calculations are those enacted at the balance sheet date, and affect how the reversal will be treated for tax purposes.
Instructions
For each of the following situations, discuss the impact on deferred tax balances.
(a) At December 31, 2017, Golden Corporation has one temporary difference that will reverse in 2018. In 2017, new tax legislation maintained the 2016 tax rate of 31% for 2017, and decreased it to 30% for 2018 and the years there- after. Explain under what circumstances Golden Corporation would use the following tax rates to calculate the future tax consequences of its temporary differences at December 31, 2017:
1. 31%
2. 30%
(b) Record Inc. uses the fair value method for reporting its investment properties. The company has an investment property with an original cost of $5 million and a tax carrying amount of $3.8 million due to cumulative capital cost allowance claimed to date of $1.2 million. This asset is increased to its fair value of $8 million for accounting purposes. No equivalent adjustment is made for tax purposes. The tax rate is 30% for normal business purposes. If the asset is sold for more than cost, the cumulative capital cost allowance of $1.5 million will be included in taxable income as recaptured depreciation, but sale proceeds in excess of cost will be taxable at a taxable gains rate of 15%. Calculate the related deferred balance assuming the value of the asset will be recovered by selling the asset.
(c) Assume the same information as provided in part (b), but the company is now revaluing a tract of land and a building that are included in property, plant, and equipment, and the revaluation method is used rather than the fair value method. The change in revaluation has been reported in other comprehensive income. All numbers remain the same as discussed in part (b) above. What differences would be noted relating to accounting for the tax impact, if any?