05 Current Taxation 05 Current Taxation

lOMoARcPSD|3314559
05 Current taxation
Financial Accounting 2A (University of Namibia)
StuDocu is not sponsored or endorsed by any college or university

Downloaded by shehroz sami (m.shehrozsami@gmail.com)
lOMoARcPSD|3314559
Solutions to GAAP : Graded Questions Taxation: various types and current income tax
Solution 5.1
a) Income tax is the tax levied by tax authorities on taxable profits.

b) Taxable profit is calculated in accordance with tax legislation and profit before tax is calculated in
accordance with International Financial Reporting Standards.
c) We use the rate that is enacted at reporting date unless the proposed new rate has been
substantively enacted at reporting date, in which case we use the proposed new rate (i.e. the
substantively enacted tax rate).
d) The difference between profit before tax and taxable profit can be split into two kinds of
differences:
 Temporary differences
 Permanent differences.
Differences that are temporary are those that will resolve over time. For instance, the cost of an
asset will be expensed by an accountant over a certain period of time where this same cost may be
deducted by the tax authorities, but over a shorter or longer period of time. Income may be
recognised as income in a different year to which the income is included in taxable profits.
Differences that are permanent are those that will not resolve over time. For instance, income will
appear in profit before tax that will never be included as income in taxable profit (e.g. dividend
income) and expenses will appear in profit before tax that will never be allowed as deductions in
taxable profit (e.g. fines).
e) Non-taxable items: Exempt portions of capital profits and dividend income.
f) Non-deductible items: Fines and certain donations.
g) The profit on sale is C80 000, split between a capital profit of C20 000 and a non-capital profit of
C60 000.
The capital gain is C20 000 and at an inclusion rate of 80%, the taxable capital gain is C16 000.
Workings
W1 Profit on sale: capital and non-capital portions C
Proceeds on sale Given 240 000

Less carrying amount Given (160 000)
Profit on sale Balancing 80 000
Capital profit Proceeds: 240 000 – Cost price: 220 000) 20 000
Non-capital profit Cost price: 220 000 – CA: 160 000; or 60 000
Balancing: Total profit: 80 000 – Capital profit: 20 000
W2: Capital gain and taxable capital gain

C
Proceeds on sale Given 240 000
Less base cost Given (220 000)
Capital gain Balancing 20 000
Inclusion rate Given @ 80%
Taxable capital gain Capital gain: 10 000 x Inclusion rate: 80% 16 000
© Service & Kolitz, 2018 Chapter 5: Page 1

lOMoARcPSD|3314559
Solution 5.1 continued . . .

h) The profit on sale is C120 000 and the taxable recoupment is C70 000.
Workings
W1: Calculation of profit or loss on sale (IFRSs) C

Proceeds on sale 220 000
Less carrying amount Cost: 300 000 – Acc depreciation:200 000 (100 000)
Profit on sale 120 000
W2: Calculation of recoupment or scrapping allowance on sale C

Less tax base Cost: 300 000 – Acc wear & tear:150 000 (150 000)
Recoupment on sale 70 000
i) The profit on sale is C 20 000 and the scrapping allowance is C30 000.
Workings
W1: Calculation of profit or loss on sale (IFRSs) C

Less carrying amount Cost: 300 000 – Acc depreciation:200 000 (100 000)
Profit on sale 20 000
W2: Calculation of recoupment or scrapping allowance on sale C

Less tax base Cost: 300 000 – Acc wear & tear:150 000 (150 000)
Scrapping allowance (30 000)
j) Income received in advance and certain expenses prepaid would cause temporary differences
between profit before tax and taxable profits. The adjustments required in order to convert profit
before tax into taxable profits are as follows:
C
Profit before tax xxx
Add income received in advance: closing balance xxx
Less income received in advance: opening balance (xxx)
Less expenses prepaid: closing balance (xxx)
Add expenses prepaid: opening balance xxx
Taxable profit xxx
k) The journal entry to account for the current income tax estimate for the year is:
Debit Credit
Income tax expense (SOCI: P/L) xxx
Current tax payable: income tax (SOFP: current liability) xxx
Current income tax estimate for the current year

lOMoARcPSD|3314559
Solution 5.2
a) False: VAT may only be claimed back if the claimant is a ‘vendor for VAT purposes’. (It
should also be noted that VAT paid on certain items is not allowed to be reclaimed per the
VAT Act).
b) False: VAT will not be charged if the seller is a ‘non-vendor’ and will not be charged if
the goods are considered to be zero-rated or exempt supplies.
c) False: employees’ tax is incurred by the employee. The company only has the obligation
to deduct such tax and pay it over to the tax authorities.
d) False: since employees’ tax is not incurred by the company, it cannot be shown as the tax
expense incurred by the company.
e) False: since the portion of the salaries and wages that are paid over to the Tax authorities
is not a tax expense incurred by the company (but rather an expense incurred by the
employee) it is not shown as part of the tax expense of the company. If it is not shown as
tax expense of the company, it must therefore be included in the salaries and wages
expense incurred by the company.
f) False: VAT paid is either a tax that is able to be reclaimed from the tax authorities,
(therefore shown as a VAT asset), or not able to be reclaimed (shown as part of the cost of
the item purchased). VAT received must always be paid over to the tax authorities, so
should be shown as a VAT liability. The VAT asset and VAT liability accounts may be
netted off and shown as a net VAT asset or liability in the statement of financial position.
g) False: inventories and cost of sales will be shown net of VAT when the VAT is able to be
reclaimed whereas it will be shown inclusive of VAT in the event that VAT is not able to
be reclaimed.
h) False: Dividends tax is a tax on the shareholder. The entity merely has the responsibility
of withholding the dividends tax (in order to pay to the tax authorities) before physically
paying the dividend to the shareholders. Thus, it is not a tax on the entity, so it will not
form part of the entity’s tax expense.
i) False: Dividends tax will form part of the dividend declared and be presented in the
statement of changes in equity.
j) False: If the company is a listed company, dividends tax is only payable when the
dividends are paid. If the company is an unlisted company, dividends tax is only payable
on the earlier of when the dividends are paid or when they are due and payable. In
conclusion, the date that the dividend is declared does not influence when the dividends
tax becomes payable.

lOMoARcPSD|3314559
Solution 5.3
a) Journals
Debit Credit
Jan 2.
Inventories (A) 300 000
Accounts payable: Pencil (L) 300 000
Purchase of inventories for C300 000 (no VAT included as from non-vendor)
Jan 5.
Current tax receivable: VAT (A) 6 079
Bank (A) 49 500
Purchase of inventories for C49 500 (including VAT: C49 500x 14/114)
Jan 7.
Accounts receivable: High (A) 1 200
Revenue: sales (I) 1 053
Current tax payable: VAT (L) 147
Sale of goods (including VAT of C1 200 x 14/114)
Cost of sales (E) 450

Inventories (A) 450
Cost of the goods sold: given
Jan 8.
Bank (A) 18 000
Revenue: sales (I) 15 789
Current tax payable: VAT (L) 2 211
Sale of goods (including VAT of C18 000 x 14/114)
Cost of sales (E) 10 500

Cost of the goods sold: given
Jan 12.
Electricity and water (E) 553
Current tax receivable: VAT (A) 77
Bank (A) 630
Payment of electricity and water (including VAT of C630 x 14/114)
Jan 14.
Telephone (E) 250
Current tax receivable: VAT 35
Bank (A) 285
Payment of telephone (including VAT of C285 x 14/114)
Jan 15.
Vehicles: cost (A) 7 500
Current tax receivable: VAT (A) 1 050
Bank (A) 8 550
Purchase of single cab truck from a VAT vendor (including VAT of C8 550 x 14/114):
since the vehicle does not meet the definition of a ‘motor car’, the VAT paid is able to
be claimed back

lOMoARcPSD|3314559

Debit Credit
Jan 17.
Vehicles: cost (A) 180 000
Loan finance: trader (L) 180 000
Purchase of single cab truck: the vehicle does meet the definition of a ‘motor car’ and
thus the VAT paid is not able to be claimed back
Jan 25.
Salaries (E) 15 000
Current tax payable: employees tax (L) 3 000
Bank (A) 12 000
Paid net salaries of C12 000 and owe C2 000 to the tax authorities
Jan 26.
Current tax payable: employees tax (L) 7 500
Bank (A) 7 500
Paid employees’ tax to the tax authorities
Jan 27.
Bank (A) 7 500
Current tax receivable: VAT (L) 7 500
Receipt of VAT refund from the tax authorities
Jan 29.
Bank (A) 18 000
Dividend income (I) 18 000
Dividend income earned
Jan 31.
Dividends declared (OE) 27 000
Current tax payable: dividends tax (L) 4 050
Shareholders for dividends (L) 22 950
Dividends declared, of which 15% is withheld and payable to the tax authorities
(27 000 x 15%) and the balance of 85% is payable to the shareholders
(27 000 x 85%)

lOMoARcPSD|3314559
Solution 5.4
All companies are provisional taxpayers. This means that no later than six months into the
company's financial year, the company must estimate its tax for the year and pay half this amount
to the tax authorities. It then has to pay the rest of the estimated tax due by the last day of its
financial year-end, in a second provisional payment. Both the first and second provisional
payments are based on estimated taxable profits.
It is, however, only possible to calculate the final estimate of the tax expense once all accounting
entries for the year have been processed and the company's final profit (or loss) for the year and
taxable profit for the year has been calculated. In practice, the finalisation of accounts takes time
and final figures are normally only available sometime after year-end. Only then can the final
tax expense be estimated and compared to the provisional payments made during the year. These
payments may have been more or less than the calculated amount. A journal entry will need to be
processed to adjust the tax expense to reflect the final tax estimate for the year, resulting in the
statement of financial position reflecting either a current tax receivable (debtor: asset) or payable
(creditor: liability) at year-end.
Usually, the tax authority's assessment of taxable profit and the resultant tax charge will coincide
with that calculated by the company. In this case, if the company still owes any tax (e.g. it has
underpaid), they will have a current tax payable in their statement of financial position and will
merely make a third, "top-up" payment to settle the tax payable. If the company overpaid and
has a current tax receivable, they will set this amount off the next provisional payment or receive
a refund from the tax authority.
It can happen, however, that the tax authority does not agree with the amount calculated by the
company. The amount provided for taxation in the statement of comprehensive income will then
not agree with the tax authority’s assessment and the company will be in the position of having
"overprovided" or "underprovided" for taxation in the previous year.
The facts given suggest that the provisional payments during the current tax year exceeded the
final tax calculated for the current tax year. In other words, there was an overpayment of tax. It
is this overpayment of tax that resulted in the recognition of the current tax receivable (asset) that
was presented in the statement of financial position in the current year.
The facts given also suggest that, during the current year, the tax authority assessed the taxation
due in the prior year as being greater than the final tax calculated and provided (i.e. recognised)
by the company in that prior year. In other words, the tax recognised in the prior year was
underprovided, which also means: under-estimated (i.e. the amount of the tax expense and tax
payable recognised in that prior year was too small). An under-provision of the tax estimate in
that prior year must be ‘corrected’ by processing an adjustment that increases the tax in the
current year. IAS 12 par 80(b) requires us to separately disclose any adjustment recognised in
the current period for current tax of prior periods (i.e. an under or over provision) in the taxation
expense note. Thus, this adjustment in the current year is presented separately as an adjustment
for the under-provision of prior year tax. The reason that we process the under-provision
adjustment relating to prior year tax in the current year is because the prior year financial
statements are finalised when we receive the assessment and thus it is too later to make a change
to the estimated final tax provided in the prior year.
Not only must the under-provision of prior year tax be recognised in the current year, it will also
have to be paid in the current year (i.e. the year in which the tax assessment is received).
Suggested discussion outline
 timing of provisional payments;
 the creation of a current tax debtor/creditor at year-end;
 the difference between "over/under-paying" and "over/under-providing";
 disclosure of the under provision in the financial statements.

lOMoARcPSD|3314559
Solution 5.5
a) Discussion
Definition of a liability
 A present obligation of the entity
 As a result of a past event
 The settlement of which is expected to result in an outflow of future economic benefits.
Definition of an expense
 Decrease in economic benefits
 During the accounting period
 In the form of decrease in assets or increase in liabilities resulting in a decrease in equity
 Other than through a distribution to equity participants.
Recognition criteria
 A reliable estimate must be possible.
 The outflow of future economic benefits must be probable.
Discussion: liability
 Since the taxable profits were earned by the entity, the tax thereon is a legal obligation of the
entity.
 The event is the earning/ receiving of the taxable profits: since the profits on which the tax is
calculated were earned/ received before 31 December 20X3, there is a past event.
 The settlement of the obligation will result in an outflow of cash when as the amount owing to the
tax authorities are paid.
Discussion: recognition criteria

 A reliable estimate is possible since the Income Tax Act is available to the public to use in the
estimate thereof / the auditors, who are professionals in this area, have already calculated the
estimated tax.
 The outflow is probable since it has either already been pre-paid via the provisional payment
system / or will have to be paid since it is a legislative requirement.
Discussion: expense
 The decrease in economic benefits is the tax outflow expected in relation to the profits made (i.e.
a decrease in profits).
 The profits arose in 20X3 and therefore the tax arose in 20X3 and thus it is a decrease in
economic benefits during the accounting period 20X3.
 Since there has been an increase in liabilities, equity will decrease.
 The tax payable on the profits is not a distribution to equity participants.
Conclusion
Since both the definitions and the recognition criteria have been met, the current tax liability and
related tax expense of C80 000 should be processed.

lOMoARcPSD|3314559
Solution 5.5 continued …
b) Journals
Debit Credit
Income tax expense (SOCI: P/L) 80 000
Current tax payable: income tax (SOFP: L) 80 000
Current income tax estimate for 20X3

Under-provision of current income tax estimate in 20X2

lOMoARcPSD|3314559
Solution 5.6
a) Ledger accounts
CURRENT TAX PAYABLE/ RECEIVABLE: INCOME TAX

20X1 C 20X1 C
30 June Bank 26 000 31 Dec Income tax expense 56 000
31 Dec Bank 28 000
31 Dec Balance W1: (1) 2 000
56 000 56 000
20X2 20X2
16 May Bank (underpayment) 2 000 1 Jan Balance 2 000
31 Dec Bank 30 000 31 Dec Balance W1: (2) 1 000
61 000 61 000
20X3 20X3
1 Jan Balance 1 000 19 May Income tax expense (under- 1 500
provision)
19 June Bank (underpayment) 500
31 Dec Bank 31 500
31 Dec Balance W1: (3) 2 500
66 500 66 500
20X4 20X4
18 April Income tax expense 200 1 Jan Balance 2 500
(over-provision)
18 May Bank (underpayment) 2 300
31 Dec Bank 34 000
31 Dec Balance W1: (4) 400
69 900 69 900
20X5
1 Jan Balance 400
Workings
W1: Balance on current tax payable/ (receivable) account
Balance at 31/12/X1 (1) 31/12/X2 (2) 31/12/X3 (3) 31/12/X4 (4)

Provided 56 000 58 000 65 000 67 400
Paid 54 000 59 000 62 500 67 000
2 000 (1 000) 2 500 400

lOMoARcPSD|3314559
a) Continued . . .
INCOME TAX EXPENSE (P/L)

20X1 C 20X1 C
31 Dec Current tax payable: income 56 000 31 Dec Profit or loss 56 000
tax
20X2 20X2
31 Dec Current tax payable: income 58 000 31 Dec Profit or loss 58 000
tax
20X3 20X3
19 May Current tax payable: income 1 500 31 Dec Profit or loss 66 500
tax (under-provision)
31 Dec Current tax payable: income 65 000
tax
66 500 66 500
20X4 20X4
31 Dec Current tax payable: income 67 400 18 April Current tax payable: income 200
tax tax (over-provision)
31 Dec Profit or loss 67 200
67 400 67 400
Workings
20X1 20X2 20X3 20X4

Assessment as per tax authorities 56 000 59 500 64 800
Provided 56 000 58 000 65 000
Under/(over) provision - 1 500 (200)
Assessment as per tax authorities 56 000 59 500 64 800
Total payments 54 000 59 000 62 500
Amount owing 2 000 500 2 300
Provided 56 000 58 000 65 000 67 400
Total payments 54 000 59 000 62 500 67 000
Statement of financial position liability (asset) 2 000 (1 000) 2 500 400

lOMoARcPSD|3314559
b) Disclosure
MISTY RIDGE LIMITED

STATEMENT OF FINANCIAL POSITION (extracts)
AS AT 31 DECEMBER 20X4
Note 20X4 20X3 20X2 20X1
C C C C
Current liabilities
Current tax payable: income tax 400 2 500 0 2 000
Current assets
Current tax receivable: income tax 0 0 1 000 0
MISTY RIDGE LIMITED

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X4
20X4 20X3 20X2 20X1
Note C C C C
Income tax expense 14 67 200 66 500 58 000 56 000
MISTY RIDGE LIMITED

NOTES TO THE FINANCIAL STATEMENTS
20X4 20X3 20X2 20X1
C C C C
14 Income tax expense
Current tax
- Current year provision 67 400 65 000 58 000 56 000
- Prior year under / (over) provision * (200) 1 500 0 0
Tax expense per statement of comprehensive income 67 200 66 500 58 000 56 000
* As the tax expense has been increased by the under provision in 20X3 (in respect of 20X2) and decreased by the
over provision in 20X4 (in respect of 20X3), a tax rate reconciliation should be disclosed for both years. The
standard tax rates and the profit before tax were not provided in the question and therefore the rate reconciliation is
not able to be completed for the purposes of this question. A tax rate reconciliation is mandatory as per IAS 12 par
81(c).

lOMoARcPSD|3314559
Solution 5.7
a) Journals
Debit Credit
31 December 20X5
Income tax expense (SOCI: P/L) 450 000 x 0,30) 135 000
Current tax payable: income tax (SOFP: current liability) 135 000
Current income tax provided for the year
Dividend declared (SOCIE: distribution of Equity) 150 000
Shareholders for dividends (SOFP: current liability) 150 000
Dividend declared
Shareholders for dividends (SOFP: current liability) 150 000 x 15% 22 500
Current tax payable: dividends tax (SOFP: current liability) 22 500
Dividends tax on dividends due as a result of declaration is withheld
b) Statement of comprehensive income
CATS AND CUDDLES LIMITED

EXTRACT FROM THE STATEMENT OF COMPREHENSIVE INCOME
20X5
C
Profit before taxation 450 000
Income tax expense (450 000 x 0,30) (135 000)
Profit for the year 315 000
Other comprehensive income for the year -
Total comprehensive income for the year 315 000

lOMoARcPSD|3314559
b) Statement of changes in equity

EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY
Share capital Retained Total
C earnings
C C
Balance at 31 December 20X4 3 000 2 325 000 2 328 000

Total comprehensive income 315 000 315 000
Dividends declared The full dividend (150 000) (150 000)
even though some
is withheld and
paid to the tax
authorities
Balance at 31 December 20X5 3 000 2 490 000 2 493 000
d) Statement of financial position

EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X5
20X5
C
EQUITY AND LIABILITIES
Current liabilities
Shareholders for dividend (150 000-22 500) 127 500
Current tax payable: income tax 135 000
Current tax payable: dividends tax 22 500

lOMoARcPSD|3314559
Solution 5.8
a) Journals
Debit Credit
31 May 20X6
Income tax expense (SOCI: P/L) 26 500 - 25 000 1 500
Current tax payable/ receivable: income tax (SOFP: L/A) 1 500
Under provision for the prior year.
Income tax expense (SOCI: P/L) W1 37 450

Current tax payable/ receivable: income tax (SOFP: L/A) 37 450
Current income tax provided for the year
Dividends declared (OE) 10 000

Shareholders for dividends ( SOFP L) 10 000
Dividends declared during the year
Shareholders for dividends (SOFP L) 10 000 x 15% 1 500

Current tax payable/receivable: dividends tax (SOFP: L/A) 1 500
Dividends tax on dividends due as a result of declaration is withheld
b) Statement of comprehensive income
PLUM LIMITED
EXTRACT FROM THE STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MAY 20X6
Note C
Gross profit (Balancing: 115 000 + 2 000 + 40 000 – 8 000) 149 000
Investment income 8 000
Operating expenses (40 000)
Finance costs (2 000)
Income tax expense (37 450 + 1 500) 12 (38 950)
Other comprehensive income for the year 0

lOMoARcPSD|3314559
c) Statement of financial position
PLUM LIMITED
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION
AT 31 MAY 20X6
ASSETS C
Current assets
Current tax receivable: income tax (43 000 – CT expense: 37 450 – Under-provision of CT 4 050
expense in PY: 1 500)
EQUITY AND LIABILITIES

Current liabilities
Shareholders for dividends 7 500
Current tax payable: dividends tax (2 250 + 1 500) 3 750
d) Notes to the financial statements: Income tax expense note
PLUM LIMITED
EXTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MAY 20X6
12. Income tax expense C
Current tax
- Current year W1 37 450
- Prior year under-provision Assessed: 26 500 – Expensed: 25 000 1 500
Tax expense per statement of comprehensive income 38 950
Tax rate reconciliation: %
Applicable tax rate (ATR) 35
Tax effects of:

Profit before tax 35.00 40 250
Exempt dividend (8 000 x 35%/115 000) (2.43) (2 800)
Under-provision (1 500 / 115 000) 1.30 1 500
Tax expense per statement of comprehensive (38 950 / 115 000) 33.87 38 950
income / effective rate

lOMoARcPSD|3314559
Workings:
W1: Current income tax expense

C
Exempt dividend income (8 000)
107 000
Temporary differences -
Taxable profit 107 000
Current income tax (C107 000 x 35%) 37 450 Dr TE; Cr CTP
W2: Current income tax payable
CURRENT TAX RECEIVABLE/PAYABLE: INCOME TAX

20X6 C 20X6 C
31 May Balance 43 000 31 May Income tax expense (Under- 1 500
(Given: opening balance of nil provision: of PY current tax:
plus provisional payments made tax assessment: 26 500 – tax
during year ended 31 May 20X6) provided: 25 000)
31 May Income tax expense 37 450
(CY current tax: W1)
Balance c/d 4 050
43 000 43 000
31 May Balance b/d 4 050

lOMoARcPSD|3314559
Solution 5.9
a) Tax-related journals
Debit Credit
31 December 20X2
(SOFP: L)
Current income tax provided for the year.
31 December 20X3
Current tax payable: income tax (SOFP: L) 87 000 - 85 900 1 100
Over-provision for the prior year.

(SOFP: L)
Current income tax provided for the year.
Dividends declared (OE) Given 30 000

Current tax payable: dividends tax (SOFPL) 30 000 x 15% 4 500
Shareholders for dividends (SOFP: L) 30 000 – 4 500 25 500
Dividends declared and dividends tax withheld.

lOMoARcPSD|3314559
Solution 5.9 continued...
b) Income tax expense note
BIG BLUE LIMITED

NOTES TO THE FINANCIAL STATEMENTS
20X3 20X2
5 Income tax expense C C
Current taxation
- Current year provision W1 84 750 87 000
- Prior year under/ (over) provision 20X2: first year of operations (1 100) -
20X3: 87 000 – 85 900
Tax expense per statement of comprehensive income Given 83 650 87 000
Tax rate reconciliation:
Applicable tax rate (ATR) 30% 30%
Tax effects of:

Profit before tax 20X2: 290 000 x 30%; 90 000 87 000
20X3: 300 000 x 30%
Exempt capital profit 20X3: (26 000 - 13 000) (3 900) -
x 30%
Exempt dividend income 20X3: 5 000 x 30% (1 500) -
Non-deductible fine 20X3: 500 x 30% 150 -
Prior year over-provision of current tax Per above (1 100) -
Tax expense per statement of comprehensive income Given 83 650 87 000
Effective tax rate (ETR) 20X3: 83 650 / 300 000 27,88% 30%
20X2: 87 000 / 290 000
c) Statement of financial position
BIG BLUE LIMITED

STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X3
20X3 20X2
Current liabilities C C
Current tax payable: income tax W2 or: 8 650 5 000
20X3: 5 000 + 84 750 (CT) -1 100(o/p)
- 80 000 (pmts)
Current tax payable: dividends tax 30 000 x 15% 4 500 0
Shareholders for dividends 30 000 – 4 500 25 500 0

lOMoARcPSD|3314559
Workings
W1: Current income tax
20X3 20X2
Profit before tax 300 000 290 000
Less capital profit Given (26 000) 0
Add taxable capital gain 26 000 x 50% (inclusion rate) 13 000 0
Less dividend received (exempt) (5 000) 0
Add fine (non-deductible) 500 0
Taxable profit 282 500 290 000
Current income tax 20X3: 282 500 x 30% 84 750 87 000

20X2: 290 000 x 30%
Dr TE Cr CTP Dr TE Cr CTP
W2: Current income tax payable
CURRENT TAX PAYABLE/ RECEIVABLE: INCOME TAX

20X3 C 20X3 C
31 Dec Income tax expense 1 100 1 Jan Balance b/d 5 000
(overprovision)
(C87 000 – C85 900)
Bank 80 000 31 Dec Income tax expense (W1) 84 750
Balance c/d 8 650
89 750 89 750
31 Dec Balance b/d 8 650

lOMoARcPSD|3314559
Solution 5.10
a) Calculation: taxable profits and current income tax
Profit before tax Given 400 000

Less exempt income:
Less dividend income Not taxable (40 000)
Less capital profits W1 (50 000)
Add taxable capital gain W1 25 000
Add non-deductible expenses:
Add back donations Not deductible 100 000
Add back fines Not deductible 10 000
Taxable profit 445 000
Current income tax C445 000 x 30% 133 500
Workings:
W1: Capital profit and Taxable capital gain on sale of building

Proceeds on sale:
Carrying amount on date of sale (Cost 500 000 – Accumulated depreciation 300 000) 200 000
Profit on sale (given) 350 000
Proceeds 550 000
Capital profit:
Proceeds (calculated above) 550 000
Less original cost/ base cost (the question stated that these were the same) 500 000
Capital profit/ Capital gain 50 000
Taxable capital gain:

Capital gain (calculated above) 50 000
Inclusion rate 50%
Taxable portion of the capital gain 25 000
b) Journals
Debit Credit
31 December 20X2
Income tax expense (E) see (a) 133 500
Current tax payable: income tax (L) 133 500
Income tax for the current year
Dividend declared (OE) Given 70 000

Current tax payable: dividends tax (L) 70 000 x 10% 7 000
Shareholders for dividends (L) 70 000 x 10% 63 000
Dividends declared and dividends tax withheld

lOMoARcPSD|3314559
Solution 5.10 continued ...
c) Disclosure
YACK LIMITED
EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
Note 20X2
C
Profit before tax 400 000
Income tax expense 4 (133 500)
Other comprehensive income for the year -
YACK LIMITED
EXTRACTS FROM NOTES TO THE FINANCIAL STATEMENTS
4. Income tax expense

20X2
C
 Current 133 500
 Deferred (no temporary differences) -
Tax rate reconciliation:

Applicable tax rate 30%
Tax effects of:

Profits before tax (400 000 x 30%) 120 000
Exempt dividend income (C40 000 x 30%) (12 000)
Exempt capital profit [(capital profit: 50K – taxable capital gain: 25 000) x 30%] (7 500)
Non-deductible fines (C10 000 x 30%) 3 000
Non-deductible donations (C100 000 x 30%) 30 000
Effective tax rate (133 500 / 400 000) 33.4%
The effective tax rate is higher than the applicable tax rate due mainly to:
 Non-deductible donations.

lOMoARcPSD|3314559
Note:
 Dividends tax does not form part of tax expense as it is a tax on the shareholders receiving the dividend, not
a tax on the company paying the dividends. The company paying the dividend merely withholds the
dividend tax (thus dividend tax is treated in much the same way as employees’ tax).
 The fact that there are no temporary differences means that there is no deferred tax. Temporary differences
and deferred tax are explained in chapter 6.
d) Calculations
Accounting Tax
records records
Selling price 550 000 550 000
Carrying amount/ tax base 200 000 220 000
(Cost 500 000 – Accumulated Depreciation: 300 000)
(Cost 500 000 – Accumulated Wear & Tear: 280 000)
Profit 350 000 330 000
Capital profit / Capital gain 50 000 40 000
Accounting: Proceeds: 550 000(part a) – Cost price: 500 000
Tax records: Proceeds: 550 000(part a) – Base cost: 510 000
300 000 280 000
Non-capital profit / recoupment
Accounting: Proceeds ltd to cost: 500 000 – CA: (cost 500 000 – accumulated
depreciation 300 000)
Tax records: Proceeds ltd to cost: 500 000 – TB: (cost 500 000 – accumulated
wear & tear 280 000)
Note:
Under the tax records, the total profit is C330 000. However, the capital gain (C40 000) and the recoupment
(C280 000) add up to only C320 000. This is because the base cost (C510 000) is C10 000 more than the cost (C500
000). Thus C10 000 of the profit is immediately exempted from tax.

lOMoARcPSD|3314559
Solution 5.11
Journals Debit Credit

20X1
Bank (SOFP: A) 60 000
Provisional tax payments (this is the total of the 2 provisional payments -
these would normally each be journalised separately)
Current income tax estimated for 20X1 (see working 1)
20X2
Bank (SOFP: current asset) 70 000
Current income tax over-estimated in 20X1 (see working 2)
20X3
Bank (SOFP: current asset) 100 000
Current income tax under-estimated in 20X2 (see working 2)

lOMoARcPSD|3314559
Workings
W1: Calculation of current income tax 20X1 20X2 20X3

C C C
Profit before tax 300 000 400 000 450 000
Non-temporary differences:
 Add donations (non-deductible) 40 000 0 0
 Less capital profit on sale of vehicle Given (20 000) 0 0
 Add taxable capital gain on sale of vehicle 15 000 x 50% 7 500 0 0
 Less capital profit on sale of machine SP: 70 -15 -15+ 40 -
CP: 70 (10 000)
 Add taxable capital gain on sale of SP: 70 – 15 -15 + 40 -
machine BC: 75 x 50% 2 500
327 500 400 000 442 500
Temporary differences
Total profit: 50 000 - (30 000)
 Less non-cap profit on sale of vehicle cap profit: 20 000
 Add recoupment on sale of vehicle (1) 30 000
SP, limited to CP: (30 000)
 Less non-capital profit on sale of machine 80 limited to70 less
CA: 70 - 15 - 15
 Add recoupment on sale of machine SP, limited to CP: 50 000
80 to 70 less
TB: 70 - 25 - 25
 Add income received in advance: c/bal 20 000 10 000 40 000
 Less income received in advance: o/bal 0 (20 000) (10 000)
 Less expenses prepaid: c/bal (30 000) (40 000) (20 000)
 Add expenses prepaid: o/bal 0 30 000 40 000
 Add depreciation 0 15 000 15 000
 Less wear and tear 0 (25 000) (25 000)
Taxable profit 317 500 370 000 502 500
Current income tax at 30% 95 250 111 000 150 750
SP: Selling price

CP: Cost price
CA: Carrying amount
TB: Tax base
BC: Base cost
(1) Yr1: the calculation cannot be performed using the usual equation (SP limited to CP - TB) since there is insufficient
information to do so. However it is 30 000 and this is determined on the basis that the question states that there are no other
TD's, thus it must equal the non-capital profit.

lOMoARcPSD|3314559
W2: Calculation of over/ under provision of current income 20X1 20X2 20X3
tax
C C C
Current income tax estimated (W1) 95 250 111 000 150 750
not yet
Current income tax assessed (Given) 94 000 114 500 assessed
(Over-provision) / Under-provision (1 250) 3 500 unknown
Assessment received in 20X2, thus journalised in: 20X2
Assessment received in 20X3, thus journalised in: 20X3

lOMoARcPSD|3314559
Solution 5.12
a) Current income tax calculation
30%
Profit before tax 963 000
Add non deductible items: donation 54 000
Add taxable capital gain: equipment ( W2.4) 108 000
Less capital profit: equipment (given) (216 000)
Temporary differences:
Add depreciation – vehicle and equipment (given) 342 000
Add impairment – equipment (given) 36 000
Less wear and tear (given) (306 000)
Less income received in advance- O/B (given) (16 020)
Add income received in advance: C/B (given) 9 900
Less expense prepaid C/B (given) (30 600)
Add expense prepaid O/B (given) 32 400
Less scrapping allowance vehicle (W1.2) (306 000)
Less non capital profit: vehicle (W1.1 / Given) (54 000)
Less non capital profit: equipment (W2.2) (36 000)
Add recoupment: equipment (W2.3) 18 000
Taxable profit 598 680 179 604 Dr TE Cr CTP
Workings
W1 Vehicle
W1.1 Vehicle: carrying amount

Proceeds Given 414 000
Profit on sale of vehicle All non-capital profit because SP less than CP: given (54 000)
Carrying amount 360 000
W1.2 Vehicle: scrapping allowance

Proceeds limited to cost Proceeds: 414 000 and Cost: 1 440 000 so not limited 414 000
Less tax base Cost: 1 440 000 – Deductions allowed: 720 000 (720 000)
Scrapping allowance (306 000)
W2 Equipment
W2.1 Equipment: proceeds on sale

Capital profit Given 216 000
Cost Given 180 000
Proceeds 396 000
W2.2 Equipment: profit on sale – non-capital portion

Proceeds limited to cost Proceeds: 396 000 limited to Cost: 180 000 180 000
Less carrying amount Given (144 000)
Non-capital profit 36 000
W2.3 Equipment: recoupment

Proceeds limited to cost Proceeds: 396 000 limited to Cost: 180 000 180 000
Less tax base Given (162 000)
Recoupment 18 000

lOMoARcPSD|3314559
a) Continued ...
W2 Equipment: continued …
W2.4 Equipment: taxable and exempt capital gain
Proceeds W2.1 396 000

Less cost Given (180 000)
Capital gain 216 000
Taxable capital gain Capital gain: 216 000 x 50% 108 000
Exempt capital gain Capital gain: 216 000– Taxable capital gain: 108 000 108 000
b) Journal entries
Debit Credit
28 February 20X6
Bank 20 430
Payment of outstanding balance
31 March 20X6
Current tax payable: income tax (L) (1 080 000 x 30%) / 2 162 000
Bank 162 000
Payment of first provisional payment
31 December 20X6
Current tax payable: income tax (L) (729 000 x 30%) – 162 000 56 700
Bank 56 700
Payment of second provisional payment
Income tax expense (P/L) Part a 179 604

Current year tax expense
Income tax expense Part a: 421 200 – 406 200 15 000

Prior year current tax expense underprovided

05 Current Taxation 05 Current Taxation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

05 Current Taxation 05 Current Taxation

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|3314559

Financial Accounting 2A (University of Namibia)

StuDocu is not sponsored or endorsed by any college or university

a) Income tax is the tax levied by tax authorities on taxable profits.

W1 Profit on sale: capital and non-capital portions C

Proceeds on sale Given 240 000

W2: Capital gain and taxable capital gain

© Service & Kolitz, 2018 Chapter 5: Page 1

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Solution 5.1 continued . . .

W1: Calculation of profit or loss on sale (IFRSs) C

W2: Calculation of recoupment or scrapping allowance on sale C

W1: Calculation of profit or loss on sale (IFRSs) C

W2: Calculation of recoupment or scrapping allowance on sale C

© Service & Kolitz, 2018 Chapter 5: Page 2

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

© Service & Kolitz, 2018 Chapter 5: Page 3

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Cost of sales (E) 450

Cost of sales (E) 10 500

© Service & Kolitz, 2018 Chapter 5: Page 4

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Solution 5.3 continued . . .

© Service & Kolitz, 2018 Chapter 5: Page 5

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

© Service & Kolitz, 2018 Chapter 5: Page 6

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Discussion: recognition criteria

© Service & Kolitz, 2018 Chapter 5: Page 7

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Solution 5.5 continued …

Income tax expense (SOCI: P/L) 7 000

© Service & Kolitz, 2018 Chapter 5: Page 8

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

CURRENT TAX PAYABLE/ RECEIVABLE: INCOME TAX

W1: Balance on current tax payable/ (receivable) account

Balance at 31/12/X1 (1) 31/12/X2 (2) 31/12/X3 (3) 31/12/X4 (4)

© Service & Kolitz, 2018 Chapter 5: Page 9

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Solution 5.6 continued . . .

INCOME TAX EXPENSE (P/L)

20X1 20X2 20X3 20X4

© Service & Kolitz, 2018 Chapter 5: Page 10

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Solution 5.6 continued . . .

MISTY RIDGE LIMITED

MISTY RIDGE LIMITED

Income tax expense 14 67 200 66 500 58 000 56 000

MISTY RIDGE LIMITED

© Service & Kolitz, 2018 Chapter 5: Page 11

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

b) Statement of comprehensive income

CATS AND CUDDLES LIMITED

© Service & Kolitz, 2018 Chapter 5: Page 12

Downloaded by shehroz sami (m.shehrozsami@gmail.com)

Solution 5.7 continued …

b) Statement of changes in equity

CATS AND CUDDLES LIMITED

Balance at 31 December 20X4 3 000 2 325 000 2 328 000

d) Statement of financial position

CATS AND CUDDLES LIMITED

© Service & Kolitz, 2018 Chapter 5: Page 13

Downloaded by shehroz sami (m.shehrozsami@gmail.com)