Assignment 3: Income Tax and Post-Employment Benefits

Assignment 3: Income Tax and Post-Employment Benefits

Introduction

You are now ready to complete Assignment 3. Before you begin, please review the “Assignment Guidelines” to ensure that you follow the correct procedure for submitting your assignments. When you have completed the assignment, submit it to your Open Learning Faculty Member and begin the next module. Please contact your Open Learning Faculty Member if you have any questions regarding the assignment. Post-Employment Benefits (10%)

This assignment is worth 10% of your course grade.

Instructions

Complete the assignment questions listed below.

Question 1 (30 marks)

Telford Corporation, a chain of tourism-based businesses, sponsors a defined benefit pension plan for its employees. Telford follows IFRS. The plan’s trustee reports the following information for calendar Year 5:

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Instructions
  1. Fill in the pension spreadsheet below.
 Remeasurement gain/lossPension expenseCashNet defined benefit liab/assetDBOPlan assets
     72,000 cr312,000240,000
Current service cost      
Past service costs      
Interest cost      
Expected return      
Remeasurement gain/loss      
Contributions      
Benefits paid      
  1. Provide the following figures:     Pension expense for Year 5     DBO ending balance     Plan assets ending balance     Net defined benefit liability/asset ending balance     Remeasurement gain/loss ending balance
  2. Prepare the pension-related journal entries for Year 5.

Question 2 (40 marks)

Bentall Ink is a chain of tattoo parlors that follows IFRS. The following data is for Year 8:

Golf club dues were $20,000.

Automated tattoo machinery was acquired on January 1, Year 7, for $200,000. Straight‐line depreciation is over a 10‐year life with a $20,000 residual value. For taxes, the 30% rate class is used, and Bentall Ink applied the CRA one-and-a-half-year rule in Year 7.

On December 31, Year 8, Bentall Ink accrued a provision for legal expense of $30,000. The estimated legal liability of $30,000 relates to four pending lawsuits. In addition to the $30,000 provision, legal costs paid out in cash during Year 8 were $60,000. These related to lawsuits started and settled during Year 8. Bentall Ink believes that the new automated equipment will reduce the number of lawsuits.

Pretax accounting income for Year 8 is $900,000. The income tax rate is 25%.

Instructions
  1. Prepare a schedule (starting with pretax accounting income) to calculate taxable income. On your schedule, indicate a subtotal for accounting income after permanent differences.
  2. Prepare the tax-related journal entries for Year 8.
  3. What is the dollar amount of income tax expense on the Year 8 Bentall Ink income statement?

Question 3 (30 marks)

Accounting income or loss for Aberdeen Corporation follows:

Year 2$180,000
Year 3300,000
Year 4100,000
Year 5(200,000)
Year 6(460,000)
Year 7150,000
Year 8176,000

For all years above, the accounting income was the same as the taxable income. The tax rate for Year 2 and Year 3 was 30%. The tax rate for Year 4 to Year 8 was 25%.

Instructions

Prepare the tax-related journal entries for Year 4 to Year 8. Aberdeen Corp. believes that it will be able to use any loss carryforward in future years. Aberdeen will apply the available carryback provisions to the earliest years first. Include your calculations.


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