ACC Inc. (ACC) began operations as a software designer on January 1, 2022. On that
day, it acquired equipment at a cost of $200,000, with an estimated useful life of eight
years and NO residual value. ACC uses straight-line depreciation. For tax purposes, the
capital cost allowance was $20,000 in 2022 and $36,000 in 2023.
Starting January 1, 2023, in its second year of operations, ACC implemented a two-year
warranty on the products it sells. During 2023, ACC accrued warranty expenses of
$60,000 but had only incurred expenditures of $20,000 relating to its warranty. ACC has
NOT had any permanent differences between accounting and taxable income.
ACC had taxable income of $400,000 in 2023. ACC was subject to tax at a rate of 40%
in 2022. In July 2023, the government unexpectedly changed the tax rate for 2023 to
30%. The tax rate for 2024 has NOT been substantively enacted.
Required:
a) Prepare a detailed calculation of ACC’s accounting income before income taxes for
2023, working backward from taxable income to accounting income before taxes.
b) Calculate ACC’s deferred tax asset or liability as at December 31, 2023.

To calculate ACC's accounting income before income taxes for 2023, we can work backward from the taxable income provided. Here's a step-by-step breakdown:

a) Calculation of ACC's accounting income before income taxes for 2023:

1. Start with taxable income for 2023, which is $400,000.

2. Apply the tax rate of 30% (as per the new rate effective July 2023):

Tax payable = Taxable income * Tax rate

= $400,000 * 30%

= $120,000

3. To find accounting income before taxes, we need to reverse the impact of the tax rate change:

Tax payable at the old rate (40%) = $400,000 * 40%

= $160,000

Additional tax expense due to rate change = $120,000 - $160,000

= -$40,000

4. Accounting income before income taxes = Taxable income + Additional tax expense due to rate change

= $400,000 - $40,000

= $360,000

b) Calculation of ACC's deferred tax asset or liability as at December 31, 2023:

1. Determine the temporary difference related to the warranty expenses:

Temporary difference = Warranty expenses accrued - Warranty expenses incurred

= $60,000 - $20,000

= $40,000

2. Calculate the deferred tax amount using the tax rate of 30%:

Deferred tax asset/liability = Temporary difference * Tax rate

= $40,000 * 30%

= $12,000

Therefore, ACC's accounting income before income taxes for 2023 is $360,000, and the deferred tax asset/liability as at December 31, 2023, is $12,000. These calculations provide insight into ACC's financial position and tax implications for the year