Basics Ltd

Suggested solution

a) Current tax calculations 20.24

Profit before tax 2,150,000 Accounting profit = amount given
+/- Permanent differences (Non deductible/non taxable items) 5,000
Dividends received - non taxable (50,000) Non-taxable income means that SARS does not tax you on these amounts,
Amortisation of licence 20,000 so you can decrease your taxable income by deducting it. Non-deductible
Donations 20,000 expenses should be added back to increase taxable income, since SARS
Penalties 15,000 does not allow it as a deduction.
Plus/Minus Temporary differences
Add back: 47,200 Acc: Prepaid: Recognise asset and only deduct as expense in next
Depreciation on machinery (R288 000 - R224 000) 64,000 period. Therefore, recognise prior year prepaid expense in current year
Wear and Tear on machinery (R300 000 x 20%) (60,000) for account.
Rental income received in advance (R20 000 x 2) 40,000 Tax: SARS allows deduction when paid. Therefore, allow prepaid
Prepaid Electricity: 20.23 15,000 expense as deduction in year of payment. So reverse prior year prepaid
20.24 (13,000) expense (accounting treatment) and allow current year prepaid amount
as deduction.
Allowance for credit losses for 20.23 (-R38 000 + R40 000) = R2 000 net movement (38,000)
Allowance for credit losses for 20.24 40,000
40% SARS allowance for 20.23 (R38 000 x 40%) = R15 200 (R15 200 - R16 000) = 15,200 Accounting movement = -R2 000 (Add back previous year provision (+R38
40% SARS allowance for 20.24 (-R40 000 x 40%) = R16 000 R800 (16,000) 000) and deduct current year provision (-R40 000). However, we must
reverse the acc movement, therefore R2 000 and allow 40% of acc
Taxable income TB Assets = FTD 2,202,200
Current tax @ 27% TB Liabilities = CA - FTD 594,594
TB IRA: CA - Revenue not taxable in the future TD x 27%
CA - TB = TD
b) Deferred tax: 27%
Amount that go to the SPL as DTincome /
20.23 CA TB TD DT SFP DT SPL
expense is the movement for the year, i.e. DTL
Machine 288,000 270,000 18,000 (4,860) Cr / DTL 4,860 Dr decreased with R1 080 from R4 860 in PY to R3
Income received in advance N/A 780 in the CY. Therefore, the DT account in the
Prepaid expense 15,000 - 15,000 (4,050) Cr / DTL 4,050 Dr SFP was Dr. The double enty principle thus
Allowance for credit losses (38,000) (15,200) (22,800) 6,156 Dr / DTA (6,156) Cr requires that the other account (income tax
2,754 account in the SPL be Cr.
20.24
Machine 224,000 210,000 14,000 (3,780) Cr / DTL (1,080) Cr
NB: If DT expense (or movement (SPL)) is asked,
Income received in advance (40,000) - (40,000) 10,800 Dr / DTA (10,800) Cr you must rememer that you need the prior year
Prepaid expense 13,000 - 13,000 (3,510) Cr / DTL (540) Cr balances. Can be that you have to calculate it if
Allowance for credit losses (40,000) (16,000) (24,000) 6,480 Dr / DTA (324) Cr they did not provide it.
Total Deferred tax expense/(income) for 20.24 (12,744)
Amount already allowed as expense for tax
purposes, therefore no FTD amounts and
c.) Journal entries to account for tax Debit Credit
Rand Rand
Dr Income tax expense (P/L) 594,594
Cr SARS tax payable (SFP) 594,594

Dr Deferred tax Asset (SFP) 12,744

Cr Income tax expense (P/L) 12,744
d.) Disclosure NB: Remenber presentation, i.e Name of entity, statements or notes, as well as period.
Basics Ltd
Statement of profit or loss and other comprehensive income for the year ended 28 February 20.24
20.24
Rand
Profit before tax 2,150,000
Income tax expense 581,850
Profit for the year 1,568,150

Basics Ltd
Statement of financial position as at 28 February 20.24
20.24
Rand
ASSETS
Non-current assets 9,990
Deferred tax
9,990
TOTAL ASSETS

EQUITY AND LIABILTIES

Current liabilities 594,594 C/B outstanding at year-end.
Trade and other creditors
594,594
TOTAL LIABILITIES

Basics Ltd
Notes to the financial statements for the year ended 28 February 20.24
20.24
Rand
4. Income tax expense
Current tax 594,594 DT movements for the year, see
Deferred tax Show DT movements for the year, see answers in (b) above. (12,744) answers in (b) above.
Capital allowances (1,080)
Income received in advance (10,800)
Prepaid expense (540)
Allowance for credit losses (324)
Income tax expense per statement of profit or loss 581,850
Numerical reconciliation between the standard tax rate and the average effective tax rate NB: Question did not specifically stated you should do the tax rate recon, it is
automatically part of the Income tax disclosure note. Look at a questions mark

Profit before tax (PBT) 2,150,000 2,150,000

Tax at standard rate 27.00% 580,500

Permanent difference R/PBT x 27%
Dividends received - non taxable -0.63% (13,500)
Amortisation of licence 0.25% 5,400
Donations 0.25% 5,400
Penalties 0.19% 4,050
27.06% 581,850
Test if your answer is correct: Total income tax amount / PBT should
Effective rate give you the same % movement. If you do numerical recon, answer 27.06% 581,850 -
or recon should be same as it should be equal to total income tax

10. Deferred tax 20.24

Deferred tax asset Rand
Allowance for credit losses 6,480
Income received in advance 10,800
Show DT balances (DTA / DTL) for the year, see answers in (b)
above. Remember DT only on temporary differences.
Deferred tax liability
Capital allowances (3,780)
Prepaid expense (3,510)

Net deferred asset 9,990