TUTORIAL 2

Exercise 12.2

Calculation of current tax

Flaxton Ltd made an accounting profit before tax of $40 000 for the year ended 30
June 2018. Included in the accounting profit were the following items of revenue and
expense.

Donations to political parties (non- 5 000

deductible)
Depreciation — machinery (20%) 15 000
Annual leave expense 5 600
Rent revenue 12 000

For tax purposes the following applied:

Depreciation rate for machinery 25%

Annual leave paid 6 500
Rent received 10 000
Income tax rate 30%

Required
1. Calculate the current tax liability for the year ended 30 June 2018, and prepare the
adjusting journal entry.
2. Explain your treatment of rent items in your answer to requirement 1.

1.
FLAXTON LTD
Current Tax Worksheet
(for year ended 30 June 2018)

$ $
Accounting profit 40 000
Add:
Donations to political parties (non- 5 000
deductible)
Depreciation expense – Machinery 15 000
Rent received 10 000
Annual leave expense 5 600 35 600
75 600
Deduct:
Rent revenue 12 000
Annual leave paid 6 500
Depreciation of machinery for tax 18 750 (37 250)
Taxable income 38 350
Current liability @ 30% $11 505

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Adjusting journal entry

30 June 2018
Income Tax Expense (current) Dr 11 505
Current Tax Liability Cr 11 505
(Being recognition of current tax liability)

2. Rent is recognised as income by Flaxton Ltd as it is earned, but will not be taxable
income until the cash is received. In the current year only $10,000 of the $12,000
rental income earned has been received and thus, an adjustment is required to
remove $2 000 from the accounting profit when calculating the company’s tax liability
for the current year. In the worksheet this is accomplished by adding all rent received
in cash to accounting profit and deducting all rent income recognised. This difference
will create a deferred tax liability of $600 ($2 000 x 30%) which will be recognised via
the deferred tax worksheet. When the cash is received next year the company will
add $2,000 rent to the accounting profit, pay the $600 tax and reverse the tax
liability.

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Exercise 12.3

Calculation of deferred tax

The following information was extracted from the records of Gin Gin Ltd for the year
ended 30 June 2018.

GIN GIN LTD

Statement of Financial Position (extract)
as at 30 June 2018
Assets
Accounts receivable $  25 000
Allowance for doubtful debts    (2 000) $23 000
Machines 100 000
Accumulated depreciation — machines  (25 000) 75 000
Liabilities
Interest payable 1 000

Additional information
(a) The accumulated depreciation for tax purposes at 30 June 2018 was $50 000.
(b) The tax rate is 30%.

Required
Prepare a deferred tax worksheet to identify the temporary differences arising in
respect of the assets and liabilities in the statement of financial position, and to
calculate the balance of the deferred tax liability and deferred tax asset accounts at
30 June 2018. Assume the opening balances of the deferred tax accounts were $0.

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 GIN GIN LTD
Deferred Tax Worksheet
as at 30 June 2018
Carrying Deductible Tax Taxable Deductible
Amount Amount Base Temporary Temporary
Differences Differences
$ $ $ $ $
Assets
Receivables 23 000 2 000 25 000 2 000
Machines 75 000 50 000 50 000 25 000

Liabilities
Interest 1 000 (1 000) 0 1 000
Payable
Total 25 000 3 000
temporary
differences
Excluded - -
differences
Temporary 25 000 3 000
differences
Deferred tax 7 500
liability
Deferred tax 900
asset
Beginning (0) (0)
balances
Movement - -
during year
Adjustment 7 500 Cr 900 Dr

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Exercise 12.6

Current and future tax consequences

Explain which of the following have current or future tax consequences:

(a) Estimated warranty costs covering a 3-year warranty are expensed for financial
reporting purposes over a 3-year period but are treated as a tax deduction in the
year in which a claim is made by a customer.
(b) The company has recognised entertainment expenses in the current period for
financial reporting purposes but these outlays are never deductible for tax purposes.
(c) Insurance is paid 2 years in advance and a prepaid asset is recognised for
accounting purposes. A tax deduction is claimed when the cash is paid.

(a) Warranty costs

For accounting purposes, there is an accounting expense in the year of sale of
inventory.
For tax purposes a tax deduction is available in the year a claim is made.
Hence there are current and future tax consequences – evidenced by the accrual of
the liability.
In relation to current tax, in the 1st year of the warranty there is an accounting
expense but no tax deduction.
For liabilities:
CA – DA = TB
For the warranty, the DA = CA, so the TB = 0.
The CA>TB. There is a deductible temporary difference.
A future tax asset would be raised at the end of the 1 st year to reflect potential future
consequences, namely the receipt of a tax deduction in the event of a claim on the
warranty by the customer.

(b) Entertainment costs

For accounting purposes there is an expense in the year of outlay.
For tax purposes, there is never a tax deduction.
This item only has current period tax consequences – note there is no accrual of an
asset or a liability.
In calculating current tax, the accounting expense would have to be added back to
accounting profit and no tax deduction being allowed.

(c) Prepaid insurance

For accounting purposes an expense and a prepaid asset are recognised in the first
year. In the 2nd year, an expense is recognised, and the prepaid asset de-
recognised.
For tax purposes, a tax deduction is received in the 1 st year.
For this item there are both current and future consequences – evidenced by the
accrual of the asset.
In calculating current tax, the accounting expense would be added back to
accounting profit and the amount paid – 2 years of insurance – would be deducted to
determine taxable income.
In calculating deferred tax, as there are taxable economic benefits:
TB = DA
For the prepaid insurance, the DA is zero, hence the TB is zero.

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The CA>TB. There is a taxable temporary difference.
The company expects to earn benefits in the 2 nd year and the tax deduction has
already been received.

Exercise 12.12

Current and deferred tax

Kilcoy Ltd has determined its accounting profit before tax for the year ended 30 June
2017 to be $256 700. Included in this profit are the items of revenue and expense
shown below.

Royalty revenue (non-taxable exempt $  8 000

income)
Proceeds on sale of building 75 000
Entertainment expense 1 700
Depreciation expense — buildings 7 600
Depreciation expense — plant 22 500
Carrying amount of building sold 70 000
Doubtful debts expense 4 100
Annual leave expense 46 000
Insurance expense 4 200
Development expense 15 000

The company’s draft statement of financial position at 30 June 2017 showed the
following assets and liabilities:

Assets
Cash $  2 500
Accounts receivable $  21
500
Less: Allowance for doubtful debts    (4 100) 17 400
Inventories 31 600
Prepaid insurance 4 500
Land 75 000
Buildings 170 000
Less: Accumulated depreciation  (59 500) 110 500
Plant 150 000
Less: Accumulated depreciation  (67 500) 82 500
Deferred tax asset (opening balance)    9 600
333 600
Liabilities
Accounts payable 25 000
Provision for annual leave 10 000
Deferred tax liability (opening 6 000
balance)
Loan 140 000
$181
000

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Additional information
(a) Quarterly income tax instalments paid during the year were:

28 October 2016 $18 000

28 January 2017 17 500
28 April 2017 18 000
with the final balance due on 28 July 2017.

(b) The tax depreciation rate for plant (which cost $150 000 3 years ago) is 20%.
Depreciation on buildings is not deductible for taxation purposes.

(c) The building sold during the year had cost $100 000 when acquired 6 years
ago. The company depreciates buildings at 5% p.a., straight-line. Any gain (loss) on
sale of buildings is not taxable (i.e. not deductible).

(d) During the year, the following cash amounts were paid:

Annual leave $52 000

Insurance 3 700

(e) Bad debts of $3500 were written off against the allowance for doubtful debts
during the year.

(f) The $15 000 spent (and expensed) on development during the year is not
deductible for tax purposes until 30 June 2018.

(g) Kilcoy Ltd has tax losses amounting to $12 500 carried forward from prior
years.

(h) The company tax rate is 30%.

Required
1. Prepare the current tax worksheet and the journal entry to recognise current tax at
30 June 2017.
2. Prepare the deferred tax worksheet and journal entries to adjust deferred tax
accounts.

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 Kilcoy Ltd
Current Tax Worksheet
(for year ended 30 June 2017)
$ $
Accounting profit 256 700
Add:
Entertainment expense (non-deductible) 1 700
Depreciation – buildings (non- 7 600
deductible)
Depreciation – plant 22 500
Insurance expense 4 200
Development expenditure 15 000
Doubtful debts expense 4 100
Annual leave expense 46 000 101 100

Deduct: 357 800

Royalty revenue (tax exempt) 8 000
Bad debts written off 3 500
Annual leave paid 52 000
Insurance paid 3 700
Depreciation – plant (tax) 30 000
Gain – Sale of buildings (non- 5 000 (102 200)
assessable)
Taxable income 255 600
Add back exempt income 8 000
263 600
Tax loss recouped (12 500)
Taxable income 251 100
Tax payable @ 30% 75 330
Less quarterly tax paid (53 500)
Current tax liability 21 830

Workings:

Depreciation of plant for tax purposes: $150 000 x 20% = $30 000.
Accumulated depreciation for tax purposes is $30 000 x 3 = $90 000.

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

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 Kilcoy Ltd
Deferred tax worksheet
Carrying Deductible Tax Base Taxable Deductible
Amount Amount Temporary Temporary
Differences Differences
$ $ $ $ $
Relevant
Assets
Receivables 17 400 4100 21 500 4 100
Prepaid 4 500 0 0 4 500 -
insurance
Buildings 110 500 0 0 110 500
Plant 82 500 60 000 60 000 22 500
Developmen 0 15 000 15 000 15 000
t expenditure

Relevant
Liabilities
Annual leave 10 000 10 000 0 10 000
Total
Temporary 137 500 29 100
Differences
Exempt
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

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Exercise 12.18

Current and deferred tax

The accounting profit before tax for the year ended 30 June 2016 for Quamby Ltd
amounted to $18 500 and included:

Depreciation — motor vehicle $  4 500

(25%)
Depreciation — equipment (20%) 20 000
Rent revenue 16 000
Royalty revenue (non-taxable) 5 000
Doubtful debts expense 2 300
Entertainment expense (non- 1 500
deductible)
Proceeds on sale of equipment 19 000
Carrying amount of equipment sold 18 000
Annual leave expense 5 000

The draft statement of financial position at 30 June 2016 contained the following
assets and liabilities.

2016 2015
Assets
Cash $   11 $   9
500 500
Receivables 12 000 14 000
Allowance for doubtful debts (3 000) (2 500)
Inventories 19 000 21 500
Rent receivable 2 800 2 400
Motor vehicle 18 000 18 000
Accumulated depreciation — motor vehicle (15 750) (11 250)
Equipment 100 000 130
000
Accumulated depreciation — equipment (60 000) (52 000)
Deferred tax asset ?     6
450
 136
100
Liabilities
Accounts payable 15 655 21 500
Provision for annual leave 4 500 6 000
Current tax liability ? 7 600
Deferred tax liability ?    2 745
 37 845

Additional information
(a) The company can claim a deduction of $15 000 (15%) for depreciation on
equipment, but the motor vehicle is fully depreciated for tax purposes.

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 (b) The equipment sold during the year had been purchased for $30 000 2 years
before the date of sale.
(c) 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 2016.
2. Prepare the deferred tax worksheet and any necessary journal entries to adjust
deferred tax accounts.

QUAMBY LTD

PART 1
QUAMBY LTD
Current Tax Worksheet
for year ended 30 June 2016

Accounting profit $18 500

Add:
Entertainment expense (non-deductible) $1 500
Depreciation – motor vehicle 4 500
Depreciation – equipment 20 000
Doubtful debts expense 2 300
Annual leave expense 5 000
Carrying amount – equipment 18 000
Rent received (tax) 15 600 66 900
Deduct:
Royalty revenue (non-assessable) 5 000
Rent revenue 16 000
Depreciation of equipment for tax 15 000
Bad debts written off 1 800
Annual leave paid 6 500
Carrying amount – equipment (tax) 21 000 (65 300)
Taxable income 20 100
Current tax liability @ 30% $6 030

Workings:

1. Sale of equipment:
Accounting Taxation
Cost 30 000 30 000
Accumulated depreciation 12 000 *9 000
Carrying amount 18 000 21 000
Proceeds on sale 19 000 19 000
Gain (loss) 1 000 (2 000)

* $30 000 x 15% x 2 years

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2. Annual leave paid

Provision for Annual Leave

$ $
30/06/16 Leave paid 6 500 1/07/15 Opening 6 000
balance
30/06/16 Closing balance 4 500 30/06/16 Expense 5 000
11 000 11 000

3. Bad debts written off

Allowance for Doubtful Debts

$ $
30/06/16 Bad debts written 1 800 1/07/15 Opening 2 500
off balance
30/06/16 Closing balance 3 000 30/06/16 Expense 2 300
4 800 4 800

4. Rent revenue received

Rent Receivable
$ $
1/07/15 Opening balance 2 400 30/06/16 Rent received 15 600
30/06/16 Rent Revenue 16 000 30/06/16 Closing balance 2 800
18 400 18 400

5. Equipment carrying amount for taxation

$100 000 (cost) x 15% x 3 years = $45 000 accumulated depreciation. Carrying
amount is then 100 000 – 45 000 = $55 000

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PART 2

Quamby Ltd
Deferred Tax Worksheet
as at 30 June 2016
Carrying Deductible Tax Taxable Deductible
Amount Amount Base Temporary Temporary
Differences Differences
$ $ $ $ $
Relevant
Assets
Receivables 9 000 3 000 12 000 0 3 000
Rent 2 800 0 0 2 800
receivable
Motor 2 250 0 0 2 250 0
vehicle
Equipment 40 000 55 000 55 000 0 15 000
Relevant
Liabilities
Annual 4 500 4 500 0 0 4 500
leave
provision
Total
Temporary 5 050 22 500
differences
Exempt - -
differences
Temporary 5 050 22 500
differences
Deferred tax 1 515
liability
Deferred tax 6 750
asset
Beginning 2 745 6 450
balances
Movement - -
during year
Adjustment 1 230 300
Dr Dr

The entries for income tax, current and deferred, are:

Income Tax Expense (current) Dr 6 030

Current Tax Liability Cr 6 030

Deferred Tax Liability Dr 1 230

Deferred Tax Asset Dr 300
Income Tax Expense (deferred) Cr 1 530

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