Name: Mahusay, Jeth A.

Date: March, 2021

Year: BSA-3 Instructor:Ms. Anna Mae Magbanua, CPA
Subject: Intermediate Accounting 2

MODULE 2
Scenario 1: Meeting Marcus
Marcus certainly doesn’t seem to be very confident in his tax knowledge!
Can you summarize some of the reconciling items when you reconcile from
the accounting profit/loss to the taxable profit/tax loss?
A. Deduct the expenses that are deductible under tax laws and recognized
for accounting purposes. Also, deduct income not included under tax laws
and recognized for accounting purposes.
B. Add back expenses not deductible under tax laws but recognized for
accounting purposes. Also, add back income included under tax laws but not
recognized for accounting purposes.
C. Deduct expenses not deductible under tax laws but not recognized for
accounting purposes. Also, deduct income not included under tax laws but
recognized for accounting purposes.
D. Add back expenses not deductible under tax laws and not recognized for
accounting purposes. Also, add back income included under tax laws but not
recognized for accounting purposes.

Determine whether added back to accounting profit or deducted from

accounting profit.
1. Doubtful debt allowed for tax purposes – 2015 (deducted from accounting
profit)
2. Product development costs (added back to accounting
profit)
3. Maintenance provision (added back to accounting
profit)
4. Tax depreciation (deducted from accounting
profit)
5. Charitable donations (added back to accounting
profit)

Marcus now understands which items need to be added to or deducted from

accounting profit to reconcile to taxable profit. Next, Marcus asks you to
double check the figures used in the reconciliation. You may find it useful to
refer to the notes above.
Choose the correct amount for each deduction or addition to accounting
profit from the following options.
1. Charitable donations [$54,000; $90,000]
2. Product development [$250,000; $500,000]
3. Maintenance provision-2016 [$137,973; $207,973]
4. Tax depreciation [$178,607; $188,445]
Marcus thanks you for assisting him with identifying the amounts that need
to be added back or deducted from accounting profit to reconcile to Nile
Ltd’s taxable profit.
Marcus is eager to recalculate Nile Ltd’s current tax.
Calculate current tax. Nile Ltd’s tax rate is 30%.
A. $2,708,011
B. $2,726,528
C. $2,734,034
D. $2,795,958
Having seen Angelina’s document, help her by completing the following
passage on different tax rates.
At December 31, 2016 the entity recognizes a current tax expense of
[$400,000; $240,000; $0; $120,000]. Subsequently, on March 15, 2017
Tyke Ltd recognizes dividends of $10,000 (before tax) from previous
operating profits as a liability. Had the dividend been declared and
recognized at the year-end the amount of tax that would have been
recognized on this portion of profit would have been [$5,000; $3,500; $0;
$10,000]. However, as no dividend had been declared the actual tax
recognized on this amount amounted to [$5,000; $3,500; $0; $10,000].
Scenario 2 Discussion with Marcus
Statement of financial position presentation
Marcus is unsure about the presentation of tax. Help him by selecting the
correct statement relating to the presentation of current tax in the
Statement of financial position.
A. Current tax is recognized as income or expense and included in profit or
loss for the period in all cases.
B. Current tax assets and liabilities can be offset if there is a legally
enforceable right for offset and there is an intention to settle them on a net
basis.
C. Current tax assets and liabilities can be offset if there is a legally
enforceable right for offset or there is an intention to settle them on a net
basis.
D. Tax assets and liabilities for consolidated entities cannot be offset.
Marcus asks you a question about a specific transaction that occurred during
the year. Nile Ltd purchased an available for sale security for $100,000 on
September 8, 2016. On December 31, 2016, Nile Ltd sold this security for
$120,000. The revenue generated from the sale was recorded in the profit
and loss and the tax rate for Nile Ltd is 30%. How will the current tax effect
of the transaction be recorded?
A. The current tax expense of $36,000 will be recorded in the profit and
loss.’
B. The current tax expense of $36,000 will be recorded in equity.
C. The current tax expense of $6,000 will be recorded in the profit and loss.
D. The current tax expense of $6,000 will be recorded in equity.

Scenario 3 Thankyou from Angelina

Step 1: Calculate the tax base for assets.
You have a few minutes before lunch, so you decide to get a start with the
deferred tax calculation. You start with Step 1: Determine the tax base and
look at the assets for Nile Ltd.
Calculate the tax base of the following assets. You may find it useful to refer
to the Notes( previous pages).
Building 1 ($363,636 - $109,091) = $254,545

Product development cost 0

Inventories ($250,000 + $31,021) = $281,021
Trade and other receivables {$435,078 + (75% x $44.922) =
$468,770

Calculate the tax base of the following liabilities. Carrying Amount ($)
Trade and other payables 3,935,396
Provision 207,973
A. The tax base for Trade and other payables and Provisions respectively is
$0 and $70,000.
B. The tax base for Trade and other payables and Provisions respectively is
$3,935,396 and $70,000
C. The tax base for Trade and other payables and Provisions respectively is
$3,935,396 and $207,973
D. The tax base for Trade and other payables and Provisions respectively is
$3,935,396 and $0
You tackle the next step in your deferred tax calculation – Step 2: Calculate
the temporary differences. Below are several assets taken from the
statement of financial position in the management Accounts of Nile Ltd.
Answers:
Building 1 90,909
Product development of costs 250,000
Inventories 31,021
Trade and other receivables 33,692
Step 2: Calculate the temporary difference for Liabilities
Next, you calculate the temporary differences for Nile Ltd’s liabilities. Below
are several liabilities taken from the Statement of financial position in the
Management Accounts of Nile Ltd.
 Temporary Difference
Trade and other payables 0
Provision 137,973

Step 3: Is it deductible or taxable?

You have just enough time left for Step 3 before lunch.
1. Building 1 Deductible
2. Product development of costs Taxable
3. Inventories Deductible
4. Trade and other receivables Deductible
Identify whether the temporary differences are deductible or taxable for the
following liabilities.
1. Trade and other payables None
2. Provision Deductible
After identifying whether Nile Ltd’s temporary differences are deductible or
taxable, you think about how these give rise to deferred taxes.
Select the correct statement below:
A. Deductible temporary differences are temporary differences that will
result in deferred tax liabilities.
B. Taxable temporary differences are temporary differences that will result in
deferred tax liabilities.
C. Deductible temporary differences are temporary differences that will
result in current tax assets.
D. Taxable temporary differences are temporary differences that will result
in deferred tax assets.
IAS 12 Income Taxes (Part 2)
Scenario 1: Taxable and deductible temporary differences

Sam’s Query
Help Sam, by answering his questions.
Should Nile Ltd recognize a deferred tax liability on goodwill as a result of
the Star LTd acquisition?
A. No. An initial recognition exemption relates to the recognition of deferred
tax liabilities on goodwill.
B. Yes. The initial recognition exemption relating to the recognition of
deferred tax liabilities also requires the transaction to not affect accounting
profit nor taxable profit, which is not the case.
C. Yes. Deferred tax liabilities must always be recognized on the recognition
of goodwill.
D. No. An initial recognition exemption relates to the recognition of deferred
tax liabilities arising from a business combination.
A deferred tax asset should be recognized for all deductible temporary
differences except for those arising from…
A. …business combinations including goodwill.
B. …the initial recognition of an asset or a liability in a transaction which is a
business combination and at the time affects neither an accounting or
taxable profit.
C. …the initial recognition of an asset or a liability in a transaction which is a
business combination.
D. …the initial recognition of an asset or a liability in a transaction which is
not a business combination and at the time affects neither accounting
Step 3: Initial Recognition Exception for Deferred Tax Liabilities
On January 1, 2015 Nile Ltd acquired a wholly owned subsidiary, Star Pty
Ltd. The transaction resulted in purchased goodwill of $50,040. Nile Ltd has
applied IFRS 3 Business Combinations, in accounting for it (i.e., no
amortization of goodwill has been recognized). The tax authorities do not
allow reductions in the carrying amount of goodwill as a deductible expense.
Carrying amount $50,040
Tax base [$0; $25,020; $50,040; $75,060]
Temporary difference [Taxable; non-taxable; deductible; non-deductible]
[$0; $25,020; $50,040; $75,060]
Deferred tax asset/liability [$0; $7,506; $15,012; $22,518]

How should Nile Ltd recognize the deferred tax asset of $900?
A. Nile Ltd should recognize in its consolidated financial statements, a
deferred tax asset of $900 and a tax expense of $900 in profit or loss.
B. Nile Ltd should recognize the deferred tax asset of $900 against goodwill
in its consolidated financial statements.
C. Nile Ltd should recognize in its consolidated financial statements, a
deferred tax asset of $900, in equity.
D. Nile Ltd should recognize in its consolidated financial statements, a
deferred tax asset of $900, in other comprehensive income.
Scenario 2: Basic principles of deferred taxes
Step 4: Calculate the Deferred Tax Assets by Applying the Correct Tax Rate
And now…time for Step 4! You looked at the work done so far and you need
to calculate the missing deferred tax for certain assets and liabilities. The tax
rate applicable is 30%.
Choices:
Answer A [27,723; 12,028; 117,000]
Answer B [(75,000); (360,000); (120,000)]
Answer C [12,028; 117,000; 0]
Answer D [75,000; 41,932; 120,000]
Calculate the Deferred Tax Assets/Liabilities on Trading Investments
You remember that Mike had mentioned you were to help with deferred tax
calculations relating to the trading investments (of which the trading
investments are recorded in accordance with IAS 39 Financial Instruments:
Recognition and Measurement.
What is the deferred tax asset/liability balance for the Held for Trading (HFT)
Investments and Available for Sale (AFS) Investments?
You may use the template below to calculate the deferred tax asset/liability.
A. Deferred tax liability for AFS instruments is $7,947 and deferred tax
liability for HFT instruments is $63,605
B. Deferred tax liability for AFS instruments is $15,894 and deferred tax
liability for HFT instruments is $63,605
C. Deferred tax asset for AFS instruments is $7,947 and deferred tax asset
for HFT instruments is $63,605
D. Deferred tax asset for AFS instruments is $15,894 and deferred tax asset
for HFT instruments is $63,605

Recognition of Deferred Tax Asset and Unused Tax Loss/Credits

You decide to take the time to help your friend Robert with his question, as
it is almost lunchtime.
At the end of 2016, the assessed loss of $20,000 is greater than the taxable
temporary difference at that date of [$7,143; $12,857; $20,000]. This would
give rise to a debit balance (i.e., a deferred tax asset) of [$0; $2,143;
($3,857); $16,143] provided future profits are [probable; not probable;
possible; impossible].
As the debit balance arose from an assessed loss, ‘convincing other
evidence’ is required that taxable profit will be available. If however future
profits are [probable; not probable; possible; impossible], the deferred tax
balance would be [$0; $2,143; ($3,857); $3,857].
At the end of 2017, the deferred tax balances would be [deferred tax
liabilities of $643; deferred tax liabilities of $1,500; deferred tax liabilities of
$5,357; deferred tax assets of $5,357]

Scenario 3: Measuring deferred taxation

Step 6: Recognition of Deferred Tax
Indicate the following items below whether to be recognized in profit or loss,
other comprehensive income or goodwill the opposite debit/credit of the
deferred tax journal.
1. Deferred Tax arising from the revaluation of ‘Machinery’ - $7,500
(deferred tax liability) – Other Comprehensive Income
2. Deferred Tax arising from the deductible temporary difference of ‘Trade
and other receivables’ - $10,108 (deferred tax asset) – Profit or Loss
3. Deferred Tax arising from the acquisition of a ‘Business combination’ -
$6,500 (deferred tax asset) – Goodwill
Presentation of Deferred Taxes in the Statement of Financial Position
You send the deferred tax calculation to Mike to review and feel a burden
has been lifted off your shoulders.
You receive another email from Sam asking about the presentation of
deferred tax assets and liabilities in the financial statements and offsetting
requirements.
A. Deferred tax assets and liabilities can always be offset against each other.
B. Deferred tax assets and liabilities can be offset if there is a legally
enforceable right for offset and there is an intention to settle them on a net
basis.
C. Deferred tax assets and liabilities can be offset if there is a legally
enforceable right for offset or there is an intention to settle them on a net
basis.
D. Deferred tax assets and liabilities for consolidated entities cannot be
offset.