Chapter 6: Accounting for Income Taxes 2. Steps in Tax Payable Method: 1. Calculate taxable income 2. Calculate tax payable (Taxable Income x Tax Rate) 3. Recognise the expense and the liability for the amount payable: Dr. Income Tax Expense (Income Statement) Cr. Current Tax Payable (Balance Sheet) 4. A deferred tax asset represents the benefit an entity will receive in the future for reduction on tax payable as a result of deductible temporary differences between carry amount and tax base of assets and liabilities. 6. Under AASB 112, a deferred tax asset must be recognised for the carry forward of unused tax losses when it is probable that the company will earn future income to utilise the tax losses. The criteria for probable are also detailed in the standard. 8. ( a ) Profit before tax 450,000 Impairment loss goodwill 2,000 Doubtful Debts 1,000 Provision for LSL 2,250 Accounting Depreciation Plant & Equip 5,000 Accounting Depreciation of Motor Vehicles 1,500 461,750 Less allowable deductions not included in expenses: Tax Depreciation Plant & Equip - 7,500 Tax Depreciation Motor Vehicle - 2,000 Taxable income 452,250 ( b ) Journal entry Dr. Income tax expense 135,675 Cr. Current Tax Payable 135,675 Income tax expense for the year 20
Chapter 6: Accounting for Income Tax 10. Carrying Amount Tax Base Difference Plant & Machinery 225,000 212,500 12,500 TTD Accounts Receivable 475,000 490,000 15,000 DTD 12. Carrying Amount Future Taxable - Future Deductible + Tax Base Temporary Difference Description Assets 1 800 0 200 1,000 200 DTA 2 6,000-6,000 5,000 5,000 1,000 DTL Liabilities 3 600 0-600 0 600 DTA 4 400 0 0 400 0-14. Isis Ltd. 2012 Dr. Deferred Tax Asset 300,000 Cr. Income Tax Revenue 300,000 Tax loss carried forward 2013 Dr. Income Tax Expense 225,000 Cr. Deferred Tax Asset 225,000 Tax loss applied 2014 Dr. Income Tax Expense 240,000 Cr. Deferred Tax Asset 75,000 Cr. Current Tax Payable 165,000 Balance of tax loss applied 16. Profit before tax 700,000 Impairment Goodwill 70,000 Entertainment Expenses 45,000 Provision for Doubtful Debts 10,000 125,000 Less revenues not assessable as income for tax: Exempt Income - 80,000 Taxable income 745,000 Tax on Taxable Income (745,000 x 30%) 223,500 21
Financial Reports 18. Valeria Ltd. ( a ) 2012 2013 2014 Profit before tax 1,080,000 1,170,000 1,210,000 Impairment loss goodwill 40,000 40,000 40,000 Provision for LSL 48,000 60,000 76,000 Accounting Depreciation - Machinery 100,000 100,000 100,000 Accounting Depreciation - Buildings 30,000 30,000 30,000 1,456,000 1,298,000 1,400,000 Less revenues not assessable as income for tax: Profit on sale of shares 0 90,000 0 1,298,000 1,310,000 1,456,000 Less allowable deductions not included in expenses: LSL paid 0 32,000 88,000 Tax Depreciation Machinery 150,000 150,000 0 Tax Depreciation Building 15,000 15,000 15,000 165,000 197,000 103,000 Taxable Income 1,133,000 1,113,000 1,353,000 ( b ) Journal entry Dr. Income Tax Expense 405,900 Cr. Current Tax Payable 405,900 Income tax expense for the year (1,353,000 x 30%) 22
Chapter 6: Accounting for Income Tax 20. Maverick Limited ( a ) Calculation of Taxable Income Net profit before taxation 300,000 Add: Impairment loss goodwill 10,000 Accounting depreciation machinery 20,000 Provision for long service leave 12,000 Provision for doubtful debts 5,000 47,000 347,000 Less Bad debt written off 2,000 Long service leave paid 6,000 Tax depreciation machinery 40,000-48,000 Taxable Income 299,000 ( b ) Carrying Tax TTD DTD Amount Base Assets CA TB TB CA Machinery at cost 100,000 100,000 Accumulated depreciation - 20,000-40,000 80,000 60,000 20,000 Cash at bank 50,000 50,000 Inventory 10,000 10,000 Accounts receivable (net) 20,000 23,000 3,000 $ 160,000 $ 143,000 Liabilities TB CA CA TB Accounts payable 16,000 16,000 Provision for long service leave 6,000 0 6,000 22,000 16,000 Net Assets $ 138,000 $ 127,000 20,000 9,000 ( c ) Accounting entries 30 June 2014 Dr. Income Tax Expense 89,700 Cr. Current Tax Payable 89,700 Taxable income 299,000 x tax rate 30% Dr. Income Tax Expense 6,000 Cr. Deferred tax liability 6,000 TTD 20,000 x tax rate 30% Dr. Deferred Tax Asset 2,700 Cr. Income Tax Expense 2,700 DTD 9,000 x tax rate 30% Dr. Deferred Tax Liability 2,700 Cr. Deferred Tax Asset 2,700 Offset deferred tax asset and liability 23
Financial Reports 22. Lamp Ltd. ( a ) Calculation of Taxable Income Profit before tax 800,000 Impairment loss Goodwill 10,000 Doubtful Debts 15,000 Provision for LSL 25,500 Depreciation - Plant & Equip 110,000 Depreciation - Motor Vehicles 20,000 180,500 980,500 Less allowable deductions not included in expenses: Depreciation Motor Vehicle 25,000 Depreciation - Plant & Equip 105,000-130,000 Taxable income 850,500 ( b ) Temporary Differences Carrying Amount Tax Base TTD DTD Assets CA TB TB CA Plant & Equipment at cost 600,000 600,000 Accumulated depreciation - 110,000-105,000 490,000 495,000 5,000 Motor vehicles at cost 46,000 46,000 Accumulated depreciation - 20,000-25,000 26,000 21,000 5,000 Cash at bank 38,000 38,000 Accounts receivable (net) 88,000 103,000 15,000 642,000 679,000 Liabilities TB CA CA TB Loan payable 250,000 250,000 Provision for LSL 25,500 0 25,500 275,500 250,000 Net Assets 366,500 429,000 5,000 45,500 ( c ) Accounting entries 30 June 2014 Dr. Income Tax Expense 255,150 Cr. Current Tax Payable 255,150 Taxable income 850,500 x tax rate 30% Dr. Deferred Tax Asset 13,650 Cr. Income Tax Expense 13,650 DTD 45,500 x tax rate 30% Dr. Income Tax Expense 1,500 Cr. Deferred tax liability 1,500 TTD 5,000 x tax rate 30% Dr. Deferred Tax Liability 1,500 Cr. Deferred Tax Asset 1,500 Offset deferred tax asset and liability 24
24. Pings Biscuits Ltd. had the following results for the past four years. Year Result 2010 Taxable Profit 200,000 2011 Taxable Loss 110,000 2012 Taxable Profit 20,000 2013 Taxable Profit 30,000 2014 Taxable Profit 80,000 The tax rate for each year is 30%. Required: Journal entries to record tax liability for each year. Chapter 6: Accounting for Income Tax Solution 2010 Dr Income tax expense 60,000 Cr Current Tax payable 60,000 Income tax expense for the year 2011 Dr Deferred tax asset 33,000 Income tax Cr revenue 33,000 Tax loss carried forward 2012 Dr Income tax expense 6,000 Cr Deferred tax asset 6,000 Tax loss applied 2013 Dr Income tax expense 9,000 Cr Deferred tax asset 9,000 Tax loss applied 2014 Dr Income tax expense 24,000 Cr Deferred tax asset 18,000 Current Tax payable 6,000 Balance of Tax loss applied 25
Financial Reports 26. Bill s Breeders Ltd. Sales 400,000 Less COGS 300,000 Gross Profit 100,000 Plus other Income Profit on Sale of Shares 88,000 188,000 Less Operating Expenses Doubtful Debts 20,000 Bad Debts 5,000 Entertainment Expenses 13,000 Salary & Wages 140,000 178,000 Net Profit before Tax 10,000 Profit before Tax 10,000 Adjustments - Less profit on Sale of Shares 88,000 Plus Doubtful Debts 20,000 Plus Entertainment Expenses 13,000 - Taxable Loss to be carried forward 45,000 Dr. Deferred tax asset 13,500 Cr. Income tax revenue 13,500 Tax loss at 30% 26