ACCT2542 S2 2018

Topic 3 (Accounting for Income Tax)- Tutorial Questions with Solutions

Chapter 12

AAE 12.15

Current and deferred tax

Kilcoy Ltd has determined its accounting profit before tax for the year ended 30 June 2020 to be
$256 700. Included in this profit are the items of revenue and expense shown below.

The accounting profit for Kilcoy Ltd for the year ended 30 June 2020 also included a gain on sale
of buildings of $5000. The company’s draft statement of financial position at 30 June 2020 showed
the following assets and liabilities.
Additional information
• Quarterly income tax instalments paid during the year were as follows.

The final balance of tax payable was due on 28 July 2020.

• The tax depreciation rate for plant (which cost $150 000 3 years ago) is 20%.
• Depreciation on buildings is not deductible for taxation purposes. The gain on sale of
buildings of $5000 (see above) was recognised on buildings sold on 1 January 2020 that had
cost $100 000 when acquired on 1 January 2014. The company depreciates buildings for
accounting purposes at 5% p.a., straight-line. Any gain (loss) on sale of buildings is not
taxable (not deductible).
• During the year, the following cash amounts were paid.

• Bad debts of $3500 were written off against the allowance for doubtful debts during the year.
• The $15 000 spent (and expensed) on development during the year is not deductible for tax
purposes until 30 June 2021.
• Kilcoy Ltd has tax losses amounting to $12 500 carried forward from prior years.
• The company tax rate is 30%.

Required
1. Prepare the current tax worksheet and the journal entry to recognise current tax at 30 June
2020.
2. Prepare the deferred tax worksheet and journal entries to adjust deferred tax accounts.
(LO4 and LO5)
1.Kilcoy Ltd

Current Tax Worksheet

(for year ended 30 June 2020)
$ $

Accounting profit 256 700

Add:

Entertainment expense (non-deductible) 1 700

Depreciation – buildings (non-deductible) 7 600

Depreciation – plant 22 500

Doubtful debts expense 4 100

Annual leave expense 46 000

Insurance expense 4 200

Development expenditure 15 000 101 100

357 800

Deduct:

Royalty revenue (tax exempt) 8 000

Depreciation – plant (tax) 30 000

Bad debts written off 3 500

Annual leave paid 52 000

Insurance paid 3 700

Gain – Sale of buildings (non-assessable) 5 000 (102 200)

Taxable profit 255 600

Add back exempt income 8 000

263 600

Tax loss recouped (12 500)

Taxable profit 251 100

Tax payable @ 30% 75 330

Less quarterly tax paid (53 500)

Current tax liability 21 830

Working:

Depreciation of plant for tax purposes: $150 000 x 20% = $30 000.

The entry to recognise current tax is:

Income tax expense (current) Dr 25 580

Current tax liability Cr 21 830

Deferred tax asset Cr 3 750

 2.

Kilcoy Ltd
Deferred tax worksheet
Carrying Future Future Tax Base Taxable Deductible
Amount Taxable Deductible Temporary Temporary
Amount Amount Differences Differences
$ $ $ $ $ $
Relevant
Assets
Accounts 17 400 0 4 100 21 500 4 100
receivables
Prepaid 4 500 4 500 0 0 4 500
insurance
Buildings 110 500 0 0 0 110 500
Plant 82 500 82 500 60 000 60 000 22 500
Development 0 0 15 000 15 000 15 000
expenditure

Relevant
Liabilities
Provision for 10 000 0 10 000 0 10 000
annual leave
Total
Temporary 137 500 29 100
Differences
Excluded
differences 110 500
Temporary 27 000 29 100
Differences
Deferred tax 8 100
liability
Deferred tax 8 730
asset
Beginning (6 000) (9 600)
balances
Movements - 3 750
during the year
Adjustment 2 100 2 880
Cr Dr
The entry to adjust deferred tax accounts is:

Deferred tax asset Dr 2 880

Deferred tax liability Cr 2 100

Income tax income Cr 780

Exercise 12.16

Calculation of movements in deferred tax accounts

The statement of financial position of Labrador Ltd at 30 June 2021 showed the following assets
and liabilities.

Additional information
• Accumulated depreciation of plant for tax purposes was $315 000 at 30 June 2020, and
depreciation for tax purposes for the year ended 30 June 2021 amounted to $75 000.
• The tax rate is 30%.

Required
Prepare a deferred tax worksheet to calculate the end of reporting period adjustment to deferred
tax asset and liability accounts as at 30 June 2021, and show the necessary journal entry. (LO5)
 LABRADOR LTD - Deferred tax worksheet as at 30 June 2021

Carrying Future Future Tax Base Taxable Deductible

Amount Taxable Deductible Temporary Temporary
Amount Amount Differences Differences

$ $ $ $ $ $

Relevant Assets

Accounts 445 000 0 55 000 500 000 55 000

receivables

Plant 240 000 240 000 110 000 110 000 130 000

Relevant
Liabilities

Provision for long 60 000 0 60 000 0 60 000

service leave

Rent received in 25 000 0 0 0 25 000

advance

Total
Temporary
Differences 130 000 140 000

Excluded
differences
- -

Temporary 130 000 140 000

Differences

Deferred tax 39 000

liability

Deferred tax asset 42 000

Beginning 38 100 40 500

balances

Movements - -
during the year

Adjustment 900 1 500

Cr Dr
Note that the future deductible amount for plant is calculated as the historical cost of $500 000 minus the
accumulated tax depreciation at 30 June 2020 of $315 000 and the extra tax depreciation for the year
ended 30 June 2021 of $75 000.

The entry to adjust deferred tax accounts is:

Deferred tax asset Dr 1 500

Deferred tax liability Cr 900

Income tax income Cr 600

Exercise 12.20

Recognition of deferred tax assets

Paddington Ltd incurred an accounting loss of $7560 for the year ended 30 June 2020. The
current tax calculation determined that the company had incurred a tax loss of $12 500. Taxation
legislation allows such losses to be carried forward and offset against future taxable profits. The
company had the following temporary differences.

At 30 June 2019, Paddington Ltd had recognised a deferred tax liability of $6750 and a deferred
tax asset of $5250 with respect to temporary differences existing at that date. No adjustment has
yet been made for temporary differences existing at 30 June 2020.

Required
1. Discuss the factors that Paddington Ltd should consider in determining the amount (if any)
to be recognised for deferred tax assets at 30 June 2020.
2. Calculate the amount (if any) to be recognised for deferred tax assets at 30 June 2020. Justify
your answer.
(LO5)
1. and 2. AASB 112/IAS 12, paragraph 24 states that deferred tax assets shall be recognised for all
deductible temporary differences (DTD) ‘to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be utilised’. The same recognition
criteria apply to deferred tax assets arising from carry forward tax losses (paragraph 34).

In determining whether it can recognise deferred tax assets with respect to tax losses of $12 500 and
deductible temporary differences of $17 000, Paddington Ltd will need to consider the following
factors.

(a) Taxable profit against which tax losses and DTDs can be utilised will be available if taxable
temporary differences (TTD) reverse in the same period as the deductions are available. Thus,
the extent and period of reversal of TTDs will need to be considered.
(b) If insufficient TTDs exist to recoup the DTDs and tax losses Paddington Ltd will need to consider
if the company will earn sufficient taxable profit in the period of reversal against which the
deductions can be made.
(c) AASB 112/IAS 12, paragraph 35 states that the existence of unused tax losses is strong evidence
that future taxable profit may not be available. Paddington Ltd will need to examine the cause of
the loss to determine whether it is due to factors which are unlikely to recur.

As Paddington Ltd has incurred a tax loss in the current year deferred tax assets can only be recognised
to the extent that TTDs exist and will reverse in the same period as the DTDs and tax losses, and to the
extent that convincing evidence exists that future taxable profits will be made.

An analysis of the temporary differences at 30 June 2020 reveals:

Existing Reversal Reversal

2020 2021 2021

DTD $17 000 $14 500 $2 500

TTD $11 500 $11 500 -

As there is no indication that the losses incurred in the year ended 30 June 2020 are a ‘one-off’,
Paddington Ltd can only recognise a DTA of $3450 ($11 500 x 30%) representing the deductions which
can be made against taxable profit arising in the year ended 30 June 2021 from the reversal of taxable
temporary differences.
Exercise 12.21

Current tax

The accounting profit before tax for the year ended 30 June 2019 for Quamby Ltd amounted to
$18 500 and included:

The draft statement of financial position at 30 June 2019 contained the following assets and
liabilities.

Additional information

• The motor vehicle is fully depreciated for tax purposes.

• The company claims tax depreciation on equipment at the rate of 15% p.a. The sale of
equipment on which a gain was recognised (see above) was the only movement in the
equipment account during the year and took place on 1 July 2018.
• The company tax rate is 30%.

Required
1. Prepare the current tax worksheet and the journal entry to recognise the current tax as at 30
June 2019. (LO4 and LO5)
1.
 QUAMBY LTD

Current Tax Worksheet

for year ended 30 June 2019

Accounting profit $18 500

Add:

Depreciation – motor vehicle $4 500

Depreciation – equipment 20 000

Rent received 15 600

Doubtful debts expense 2 300

Entertainment expense (non-deductible) 1 500

Annual leave expense 5 000 48 900

Deduct:

Depreciation – equipment (tax) 15 000

Rent revenue 16 000

Royalty revenue (non-assessable) 5 000

Bad debts written off 1 800

Gain on sale of equipment (accounting) 1 000

Loss on sale of equipment (tax) 2 000

Annual leave paid 6 500 (47 300)

Taxable profit 20 100

Current tax liability @ 30% $6 030

Workings:

Depreciation of equipment for tax purposes: depreciation expense for equipment ($20 000) / 20% x
15% = $15 000

Rent received: opening balance of rent receivable ($2 400) + rent revenue ($16 000) – ending balance
of rent receivable ($2 800) = $15 600.

Bad debts written off: opening balance of allowance for doubtful debts ($2 500) + doubtful debts
expense ($2 300) – ending balance of allowance for doubtful debts ($3 000) = $1 800.

Annual leave paid: opening balance of provision for annual leave ($6 000) + annual leave expense ($5
000) – ending balance of provision for annual leave ($4 500) = $6 500.

Gain/loss on equipment sold for tax purposes: the gain for tax purposes is equal to proceeds from
sale minus the carrying amount of equipment sold for tax purposes. The proceeds on sale are equal to
the accounting carrying amount of equipment sold + gain on sale for accounting purposes ($1 000). The
accounting carrying amount of equipment sold is equal to the difference between the historical cost of
equipment sold ($130 000 - $100 000) and its accumulated depreciation ($52 000 + $20 000 - $60 000).
The carrying amount of equipment sold for tax purposes is equal to the difference between the historical
cost of equipment sold ($130 000 - $100 000) and its accumulated tax depreciation ($52 000 + $20 000
- $60 000) / 20% x 15%. Therefore, the accounting carrying amount of equipment sold is $18 000,
making the proceeds on sale equal to $19 000, the carrying amount for tax purposes $21 000 and the
loss on sale for tax purposes $2000.
Those amounts (excluding the depreciation of equipment and gain/loss on equipment sold for tax
purposes) can also be calculated by recreating the ledgers for the affected accounts as follows:

Rent Receivable

$ $

1/07/18 Opening balance 2 400 30/06/19 Rent received 15 600

30/06/19 Rent revenue 16 000 30/06/19 Ending balance 2 800

18 400 18 400

Allowance for Doubtful Debts

$ $

30/06/19 Bad debts written off 1 800 1/07/18 Opening balance 2 500

30/06/19 Ending balance 3 000 30/06/19 Expense 2 300

4 800 4 800

Provision for Annual Leave

$ $

30/06/19 Leave paid 6 500 1/07/18 Opening balance 6 000

30/06/19 Ending balance 4 500 30/06/19 Expense 5 000

11 000 11 000