Accounting FOR Income TAX Lecture 10 practice questions with answers PDF

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Download Accounting FOR Income TAX Lecture 10 practice questions with answers PDF

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Alley Ltd commenced operations on 1 July 2006. The following financial information is available for the years ended 30 June 2007 and 2008: 2007 Taxable income

2008

120,000

150,000

Assets and liabilities as disclosed in the balance sheet ASSETS Cash Inventory Accounts receivable 120,000 less allow. for doubt. debts (10,000) Prepaid insurance Plant –cost 150,000 less accum depreciation (30,000) Total assets

120,000 309,000

LIABILITIES Accounts payable Unearned revenue Provision for annual leave Total liabilities Net assets

45,000 5,000 4,000 54,000 255,000

30,000 35,000 110,000 14,000

45,000 65,000 135,000 6,000 150,000 (60,000)

129,000 13,000 90,000 342,000

66,000 3,000 6,000 75,000 267,000

Other information i)

The plant is depreciated over 5 years for accounting purposes, but over 3 years for taxation purposes.

ii)

Revenue received in advance by the company is assessable for tax purposes in the year in which it is received.

iii)

The tax rate is 30 per cent.

Required a)

Determine the deferred taxes, and prepare the journal entries to account for the income tax for the year ended 30 June 2007. Use a tax worksheet.

b)

Determine the deferred taxes, and prepared the journal entries to account for the income tax for the year ended 30 June 2008. Use a tax worksheet.

c)

Show the ledger accounts for the deferred tax asset and the deferred tax liability after the above entries.

Alley Ltd

Item

DETERMINATION OF TAX ASSETS AND LIABILITIES as at 30 June 2007 Carrying Taxable Deductible Tax base Taxable amount amount amount temp diff

Assets Cash Inventory A/cs receivable Insurance Plant

30,000 35,000 110,000 14,000 120,000

0 (35,000) 0 (14,000) (120,000)

0 35,000 10,000 0 100,000

30,000 35,000 120,000 0 100,000

Liabilities Accounts payable Unearned revenue Provn for annual leave

45,000 5,000 4,000

0 (5,000) 0

0 0 (4,000)

45,000 0 0

10,000 14,000 20,000

5,000 4,000

Temporary differences

34,000

Deferred tax liability (30%) Deferred tax asset (30%) Beginning balances Move’t during period Adjustment

10,200 0 0 10,200

Journal entries: Income tax expense 36,000 Current tax liability (recognition of tax liability - $120,000 x 30%)

36,000

Income tax expense 10,200 Deferred tax liability (movement in deferred tax liability)

10,200

Deferred tax asset Income tax income (movement in deferred tax asset)

5,700 5,700

OR Income tax expense 40,500 Deferred tax asset 5,700 Deferred tax liability 10,200 Current tax liability 36,000 (tax adjustments arising from temporary differences)

Deductible temp diff

19,000

5,700 0 0 5,700

b)

Item

DETERMINATION OF TAX ASSETS AND LIABILITIES as at 30 June 2008 Carrying Taxable Deductible Tax base Taxable amount amount amount temp diff

Assets Cash Inventory A/cs receivable Insurance Plant

45,000 65,000 129,000 13,000 90,000

0 (65,000) 0 (13,000) (90,000)

0 65,000 6,000 0 50,000

45,000 65,000 135,000 0 50,000

Liabilities Account payable Unearned revenue Provn for annual leave

66,000 3,000 6,000

0 (3,000) 0

0 0 (6,000)

66,000 0 0

6,000 13,000 40,000

3,000 6,000

Temporary differences

53,000

Deferred tax liability (30%) Deferred tax asset (30%) Beginning balances Move’t during period Adjustments

15,900 10,200 0 5,700

Journal entries: Income tax expense 45,000 Current tax liability (recognition of tax liability - $150,000 x 30%) Income tax expense Deferred tax liability (movement in deferred tax liability)

5,700

Income tax expense Deferred tax asset (movement in deferred tax asset)

1,200

45,000

5,700

1,200 OR

Income tax expense 51,900 Deferred tax asset 1,200 Deferred tax liability 5,700 Current tax liability 45,000 (tax adjustments arising from temporary differences)

Deductible temp diff

15,000

4,500 5,700 0 (1,200)...