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A/R1000,0000Warranty Lib040,000Sales01,000,000Warranty Exp40,0000Recall the matching principle: In income taxes, same principle as in liability - you match based on the income;GAAP -> Acct Income -> Acct Expense (Depreciation)This is not the same as:Income Tax Act -> Taxable Income -> Determine income tax payable (CCA)e.g. Acctt Inc: 100,000 and tax 20% -> $20,000 DR Inc Tax Expense 20kInc Tax Payable20Problem: acct income and taxable income rarely equal in one year! Temporary Differences or Timing Differences:Timing difference: accounting depreciate using GAPP, and tax Act CCA Differences resulted in specific taxable income due to timing.Examples:Depreciation:Acct (GAAP)Tax100,000100,00010% -> 10,00020% -> 20,000Warranty: Acct TaxEarned - Liab.Earned Permanent DifferencesDividend connected -> income purposes (ACCT), but not taxable so not Tax purposeWork through step by step of getting to each component of the taxable income AI100,000Tax Rate50%Or could be 16K CR with deferred Tax: 4,000Differed taxes FTL / FTAAccounting For Income TaxesAugust-16-149:11 AMClass2 Page 1
AI 100,000 x 50% = 50,000 Expense, 50,000TI 100,000 x 50% = 50,000 Pay, 50,000Inc. Tax Expense 50,000Inc. Tax Payable 50,000CurrentInc Tax Payable 50,000 Liab. Liab.Inc. Tax Payable050,000Income Before Tax 100,000Income Tax Expense50,000NI For The Year50,000AI > TIAccounting income => Adjustments => Taxable IncomeAccounting Income100,000Depreciation+20,000CCA (Cap. Cost Allowance)-50,000(net effect ->Temporary diff)-30,000Taxable Income70,000Inc. Tax Expense 50,000Inc. Tax Payable35,000Future Tax Liab15,000Expense = Accounting Income is because of matching principle!Expense, Payable, Futures => always the same; I/SAI: 100,000ITEYPCurrent35,000Future15,00050,000NIFYR50,000Example:20102011201220132014Sales$ 500,000 $ 450,000 $ 550,000 $ 600,000 $ 620,000 Exp$ 380,000 $ 310,000 $ 430,000 $ 480,000 $ 230,000 Depn$ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 400,000 $ 330,000 $ 450,000 $ 500,000 $ 250,000 Acct Inc$ 100,000 $ 120,000 $ 100,000 $ 100,000 $ 370,000 Tax Rate40%40%40%40%40%CCA$ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 <= add this back cuz it is taking out of the income statement<= subtract this because it can be allowedB/SCurrent IRTP35,000Future Tax Liab15,000Class2 Page 2