AC311 International Financial Reporting Standard Issues

Illustrative Example 4.2 Determination of current tax worksheet.

Iris Ltd’s accounting profit for the year ended 30 June 2013 was K250, 450. Included in this profit
were the following items of revenue and expense:
Amortisation – development projects K30,000
Impairment of goodwill expense 7,000
Depreciation – Equipment (15%) 40,000
Entertainment Expense 12,4580
Insurance Expense 24,000
Doubtful Debt Expense 14,000
Proceeds from Sale of Equipment 30,000
Carrying amount of Equipment sold 36,667
Rent revenue 25,000
Annual leave expense 54,000

At 30 June 2013, the company’s draft statement of financial position showed the following balances:
30 June 30 June
2013 2012
Assets
Cash K55,000 K65,000
Accounts receivable 295,000 277,000
Allowance for doubtful debts (16,000) (18,000)
Inventories 162,000 185,000
Prepaid insurance 30,000 25,000
Rent receivable 3,500 5,500
Development project 120,000 -
Accumulated amortisation (30,000) -
Equipment 200,000 266,667
Accumulated Depreciation (90,000) (80,000)
Goodwill 35,000 35,000
Accumulated impairment expense (14,000) (7,000)
Deferred tax asset ? 24,000
Liabilities
Accounts Payable 310,500 294,000
Provision for annual leave 61,000 65,000
Mortgage loan 100,000 150,000
Deferred tax liability ? 57,150
Current tax liability ? 12,500

Additional information.
1. Taxation legislation allows Iris Ltd to deduct 125% of the K120, 000 spent on development
during the year.
2. Iris Ltd has capitalised development expenditure relating to a filter project and amortises the
balance over the period of expected benefit (4 years).
3. The taxation depreciation rate for equipment is 20%
4. The equipment sold on 30 June 2013 cost K66, 667 when it was purchased 3 years ago.
5. Neither entertainment expenditure nor goodwill impairment expense is deductible for taxation
purposes.

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6. The company income tax rate is 30%.
Calculation of the tax payable.
Before completing the worksheet, all the differences between accounting and taxation figures
must be identified:

1. Development project.
There are two differences here: a permanent difference arising from extra 25% deduction
allowed by tax legislation, and a temporary arising from the treatment of development
costs. For accounting purposes, the K120, 000 has been capitalised and will be amortised
over 4 year; for tax purposes, the entire expenditure is deductible in the current year. The
tax deduction for development is therefore: K150, 000 (K120, 000 + (K120,000x25%)).
2. Impairment of goodwill expense.
No tax deduction is allowed for impairment expense (IAS 12, section 6.9). Therefore a
permanent difference exists.
3. Depreciation expense – equipment
Because equipment is being depreciated at a faster rate for taxation purposes, a temporary
taxable difference will exist. The amount of depreciation deductible is
K53, 333.40 (K166, 667x20%).
4. Entertainment expense
No deduction is allowed for entertainment expenditure, so the taxation deduction is nil and
there is a permanent difference.
5. Insurance Expense
Insurance expense is deductible when incurred. The existence of prepaid insurance asset
account in the statement of financial position indicates that the insurance payment and
insurance expense figures are different. It is therefore necessary to reconstruct the asset
account to identify if any part of the expense has already been deducted for taxation
purposes.

Prepaid Insurance
Balance b/d 25,000.00 Balance c/d 30,000.00
Insurance paid 29,000.00 Insurance expense 24,000.00
54,000.00 54,000.00
The insurance paid figure of K29, 000 represents the deduction allowable in determining
taxable profit. The expense figure of K24, 000 shows that the payment made includes K5,
000 for insurance cover for the next accounting period. When this amount is expensed , no
deduction will be available against taxable profit.

6. Allowance for doubtful debts

If, under taxation legislation, no deduction is allowed for bad debts until they have been
written of, the taxation amount for doubtful debts will be nil.

Allowance for Doubtful Debts

Balance b/d 16,000.00 Balance c/d 18,000.00
Bad debts w/off 16,000.00 Doubtful debt exp 14,000.00
32,000.00 32,000.00

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 The allowable deduction for bad debts written off is therefore K16, 000.
7. Proceeds on sale of equipment.
All this revenue is taxable, so there is no permanent or temporary difference.

8. Carrying amount of equipment sold

The gain or loss on the sale of equipment is different for accounting and taxation purposes.
Accounting Taxation
Costs K66,667 K66,667
Accumulated Depreciation 30,000 40,000
Carrying amount 36, 667 26,667
Proceeds 30,000 30,000
Gain (loss) K(6,667) K3,333

Note that PNG Taxation Act 1959 does not allow tax for capital gains.

9. Rent revenue.
Rent is taxable when received.
Rent Receivable
Balance b/d 5,500.00 Balance c/d 3,500.00
Rent revenue 25,000.00 Cash received 27,000.00
30,500.00 30,500.00

10. Annual leave expense

Annual leave is deductible when paid in cash.
Provision for Annual Leave
Balance b/d 61,000.00 Balance c/d 65,000.00
Leave paid 58,000.00 Leave expense 54,000.00
119,000.00 119,000.00

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 Iris Ltd
Current Tax Worksheet
For the year ended 30 June 2013
K K
Accounting Profit 250,450
Add:
Amortisation of Development Expenditure 30,000
Impairment of Goodwill expense 7,000
Depreciation Expense 40,000
Entertainment Expense 12,450
Insurance Expense 24,000
Doubtful Debt Expense 14,000
Carrying amount of equipment sold (accounting) 36,667
Annual leave expense 54,000
Rent received (tax) 27,000 245,117
495,567
Deduct:
Rent revenue (accounting) 25,000
Carrying amount of equipment sold (tax) 26,667
Bad debts written off 16,000
Insurance paid 29,000
Development costs paid 150,000
Annual leave paid 58,000
Depreciation of equipment for tax 53,333 (358,000)
Taxable profit 137,567
Current liability @ 30% K41,270

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