Income Tax Compilation PYQ Lecturer PDF

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FAR 570: INCOME TAXESTUTORIAL QUESTIONQ1: Jan 2018Kanon Bhd, a public listed company based in Penang, manufactures a wide variety ofstationeries for office use. Tax expense for the year 2016 was RM240,000 which excludes changes in deferred tax liability. The deferred tax liability on 31 December2015...

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FAR 570: INCOME TAXES TUTORIAL QUESTION

Q1: Jan 2018 Kanon Bhd, a public listed company based in Penang, manufactures a wide variety of stationeries for office use. Tax expense for the year 2016 was RM240,000 which excludes changes in deferred tax liability. The deferred tax liability on 31 December 2015 was estimated at RM330,000. The tax rate for 2016 was 25%. The following are information regarding entity’s assets and liabilities for the year 2016: 1. The investment of RM30,000,000 is a financial asset acquired in February 2016. It is classified as fair value through profit and loss. As at 31 December 2016, its fair value was determined to be RM32,000,000. 2. The company also recognizes a liability of RM600,000 for accrued product warranty costs on 31 December 2016. These product warranty costs will not be deductible for tax purposes until the entity pays claims. 3. An allowance for doubtful debts of 10% is to be made and the tax rules only allow specific provision for bad debts. As at 31 December 2016, the company’s account receivables has an amount of RM70,000. Required: a. Explain briefly the TWO (2) categories of future tax consequences in accordance to MFRS 112 Income Taxes. (4 marks) Deferred tax liabilities - the amounts of income tax payables in future periods in respect of taxable temporary differences. √√ Deferred tax assets - the amounts of income taxes recoverable in future periods in respect of deductible temporary differences; the carryforward of unused tax losses; and the carryforward of unused tax credits. √√ b. Categorize the entity’s assets and liabilities into taxable temporary difference or deductible temporary difference for the items listed above. (3 marks) Carrying amount (RM) Investment FVTPL Warranty Account receivables

Tax base (RM)

TTD (RM)

DTD (RM)

32,000,000

30,000,000

2,000,000√ TTD√

600,000

0

600,000√ DTD√

63,000

70,000

7,000√ DTD√ 2,000,000

607,000 1|Page

c. Construct an extract statement of profit or loss for the year ended 31 December 2016. (Show relevant computation) (6 marks) Net temporary differences = 2,000,000 – 607,000 = 1,393,000 (TTD) √of Deferred tax liability √ = 1,393,000 x 25%√ = 348,250 Deferred Tax A/C RM

RM Balance b/d

Balance c/d

348,250

P&L - DTE

403,250

330,000 73,250 √ 403,250

Extract of Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2016 RM Profit before tax

RM xxxx

Less: Tax expense Current tax expenses Deferred tax expense √

240,000√ 73,250

313,250

Q2. June 2018 In 2017, Loveletters Bhd entered into an agreement with its existing employees to provide 2|Page

healthcare benefits to retirees amounting to RM500,000. The entity recognized this amount as accrued healthcare benefits in the Statement of Financial Position as at 31 December 2017. The Inland Revenue Board has ascertained that healthcare costs are deductible for tax purposes when payments are made to retirees. The entity also revalued its office building to its current fair value of RM1,500,000. This has resulted in revaluation surplus of RM700,000. The entity is undecided as to whether to use the office building for business expansion or to sell the office building to unrelated party at arm’s length. Tax rate applicable for the year is 26% while the real property gain tax is 5%. a. Briefly discuss two (2) types of temporary differences. (4 marks) b. Taxable temporary differences√, which are temporary differences that will result in taxable amounts√ in determining taxable profit (tax loss) of future periods√ when the carrying amount of the asset or liability is recovered or settled√. c. Deductible temporary differences√, which are temporary differences that will result in amounts that are deductible√ in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled√.

d. b. Compute the amount of deferred tax asset / liability that shall arise from the healthcare benefit costs. (3 marks) Particulars Accrued benefits

healthcare

Carrying amount RM

Tax Base RM

DTD RM

500,000√

-√

500,000

Tax rate

26% 130,000

DTA √ e.

c. Evaluate the deferred tax implication on the revaluation surplus of the entity’s decision as to whether: i. Utilise the office building for business expansion; or Should the company decided to utilise the office building for business expansion, the revaluation surplus is said to be recover through use Therefore, the company shall use the income tax rate of 26% √ to determine its deferred tax liability. √

ii.

Sell to unrelated party at arm’s length. Should the company decided to sell to unrelated party at arm’s length, the revaluation surplus is said to be recover through sale√. Therefore, the company shall use the real property gain tax rate of 5% √ to determine tax 3|Page

liability. √

Q3. July 2017 B

Veeda Beauty Bhd is a manufacturing company producing health care products. The following information relates to the assets and liabilities of the company for the year ended 30 June 2016. i.

As at 1 July 2015, the net book value of a machinery was RM2 million. The machinery was purchased on 1 January 2014 at a cost of RM2,500,000. The machine is depreciated at 10% per annum on a straight-line method yearly basis. The Inland Revenue Boards allows a capital allowance on such machine at 15% and initial allowance of 10%. The research and development expenditure of RM2.4 million was incurred during the year. The tax authority allows all the research and development costs to be written off immediately in computing taxable profit.

ii.

Required: i.

Identify the amount of temporary differences for machinery and research and development for the year 2016. (4 marks) Carrying Amount RM

Machine Net book value Less: Depreciation for the year (2,500,000x10%) Balance c/d

Tax Base RM

2,000,000√ (250,000)√√ 1,750,000

Cost

2,500,000√

Less: Initial Allowance (10%) Less: Accumulated AA (15% x 3 yrs)

250,000√ 1,125,000√

Research & Development

ii.

Temporary Difference RM

2,400,000√

1,125,000

625,000

-√

2,400,000 3,025,000

Analyze the calculated temporary difference in (a) above in order to determine the future tax consequences for Veeda Beauty Bhd as at 30 June 2016. (3 marks) 4|Page

Since the carrying amount of both assets > tax base of assets√ , hence both classified as taxable temporary difference (TTD) √. TTD will give rise to deferred tax liability√ i.

ii. iii. iv.

Construct an extract statement of profit or loss and other comprehensive income for the year ended 30 June 2016. Given below is additional information that is useful in the preparation of the above statement. Show suitable computations where necessary. The company made a profit of RM16.4 million for the financial year Deferred tax liability as at 1 July 2015 was RM500,000 Current tax expense is RM3,843,750 (6 marks)

Suitable computations DTL – bal b/d (1/7/2015) DTE (balancing figure) Balance c/d (625,000+2400,000) x 25% 3,025,000 x 25%

RM 500,000√ 256,250 756,250√√

Extract Profit or Loss and OCI for the year ended 30 June 2016 RM RM Profit before tax 16,400,000√ Less: Tax expense Current tax 2016 expense 3,843,750 √ Q4. Dec Deferred tax expense 256,250 √ 4,100,000 B taxTok Janggut Bhd is engaged in 12,300,000 café operation since January 2010. The entity owns Profit after several outlets in Lembah kelang. The following information relates to assets and liabilities of Tok Janggut Bhd for the year ended 31 December 2014 and 2015. 1. The deferred tax liability as at 31 December 2014 was RM 1000. 2. Coffee shop equipment’s was bought in January 2013 at cost of RM65,000. The equipment is depreciated at 20% per annum on a straight line basis. According to Inland Revenue, the equipment qualifies for an initial allowance of 20%and an annual allowance of 10%. 3. In January 2015, the entity acquired the rented building at the cost of RM750,000. The building has an estimated useful life of 30 years with no salvage value. It is depreciated on the straight line basis. Under the tax rules, it qualifies for an annual allowance of 5%. 4. As at entity’s reporting date 31 December 2015, the tax rate is 28%. On 1 December 2015, the government reduced and enacted the tax rate to 25% for accounting period beginning on 1 January 2016 and thereafter. Required: a. Describe the TWO (2) categories of future tax consequences under MFRS 112 Balance Sheet Approach. (4 marks) - Deferred tax assets: If future tax consequences result in unexpected tax refund in future 5|Page

-

Deferred tax liability: if future tax consequences result in an expected tax payment in a future period. b. Calculate the tax base for the equipment and building in accordance to MFRS 112 Income Taxes. ( 3 marks) 2,015 Machine Cost 65,000 Initial allowance 13,000 Acc Annual Allowance 19,500 Tax base 32,500 Building Cost Acc Annual allowance (5%) Tax base

-

750,000 37,500 712,500

c. Propose the amount of deferred tax expenses to be reported for the year ended 31 December 2015 in accordance to MFRS 112 Income Taxes. (Show the relevant calculation to support your proposal) (6 marks) Temporary Difference CV Tax base TTD DTD Machine Cost 65,000 Acc Dep (20% x 3yrs) 39,000 26,000 32,500 6,500 Building Cost Acc Dep (750,000/30 yrs) -

750,000 25,000 725,000

712,500

12,500

Net temporary difference= 12500-6500= 6000 (TTD) Deferred tax liability 6000x 25%=RM1500 Deferred tax expenses RM Bal b/f (1 jan 2015) No restatement since there is no change in tax rates between 2013 & 2014 Deferred tax expenses (Bal figure) Bal c/f (31 Dec 2015)

1,000 Nil 250 1,500

Q5. June 2016 B

Given below is the draft Statement of Financial Position of Gemilang Bhd as at 31

6|Page

December 2015: RM

RM

Non-Current Assets Property,Plant and Equipment

RM

120,000

Development costs

16,000 136,000

Current Assets Accounts receivable (-) Specific allowance for doubtful debt Bank

33,600 (200) 33,400 17.800

Issued and paid up capital Share capital

51,200 187,200 90,000

Retained earnings

57,000

Non-Current Liabilities 13,200

Deferred tax liability (1 January 2015) Current Liabilities

1,500

Provision for warranties Account payables

25,500

27,000 187,200

Additional Information: 1. The property, plant and equipment was purchased for RM600,000 on 1 January 2012 and depreciated on a straight line basis over five years. The property, plant and equipment qualify for an initial allowance of 10% and annual allowance of 20%. 2. The development costs were incurred during the year. The development costs are allowed to be written off by Inland Revenue Board in the year it is incurred. 3. Inland Revenue Board allowed warranties to be deducted when it is incurred. 4. For the year ended 31 December 2015, the company made a profit of RM120,000, after deduction of specific allowance for doubtful debts and provision for warranties. 5. The tax rate for the year is at 26%. Required: a. Calculate the taxable temporary difference or deductible temporary difference for the year ended 31 December 2015. (4 marks)

7|Page

CV Plant & equipment Cost Acc Dep ( 600,0000/5 x 4yrs)

-

Tax base 600,000 480,000

Cost Initial allaowance (10% x 600000) Annual allowance (20% x600000x4yrs) 120,000

600,000 60,000 480,000 60,000

16,000 33,600 200 1,500

33,600 -

-

Development Expenditure Accounts receivable (Gross) Prov for DD Prof for warranties

Temporary Difference TTD DTD

60,000 16,000 200 1,500 1,700

76,000

b. Compute the deferred tax for Gemilang Bhd as at 31 December 2015. (3 marks) Net temporary different (76000-1700)= RM74,300 Tax rate x 26% Deferred tax liability RM19,318 c. Construct an extract of Statement of Profit or Loss for the year ended 31 December 2015. (6 marks) Extract SOPL for the year ended 31 Decembr 2015 RM Profit before tax Less: tax expense Current tax exp

120,0 00

25,082 31,20 0

Deferred tax exp

6,118

88,80 0

Deferred Tax liability RM

RM

Balance b/d 13,200

8|Page

Balance c/d

19,318 P&L - DTE 19,318

6118 19,318

Q6. June 2015 B Aswara Bhd, a manufacturing company, started business on 1 January 2014. An equipment was acquired at the beginning of the year 2014 for RM500,000 with a 10% residual cost. The equipment is depreciated based on a straight-line basis over 10 years. The carrying amount of the equipment at the end of the year is RM405,000. For income tax purposes, the equipment qualifies for initial allowance of 20% and annual allowance of 10%. The company has also incurred research and development cost for RM200,000, of which RM80,000 was eligible for capitalization. For income tax purposes, development cost is deducted in the same year as it is incurred. For the year ended 31 December 2014, the company made a profit before tax of RM225,000. Current tax rate is 30%. Required: a. Describe the two (2) types of temporary difference. (4 marks) - Taxable temporary difference is the difference that resulted from either the carrying amount of an asset is greater than its tax base or when the carrying amount of a liability is less than its tax base. - Deductible taxable difference is the difference that resulted from either the carrying amount of an asset is less than its tax base or when the carrying amount of a liability or greater than its tax base. b. Calculate the amount of deferred tax liability/asset as at 31 December 2014. (3 marks)

CV RM

Temporary Difference TTD DTD RM RM

Tax base RM

Equipment CV

405,000

Initial allowance (20%) Annual allowance (10%)

405,000

Development expenditure Temporary difference Tax rate Deferred tax liability

500,000

80,000

100,000 50,000

350,000

55,000 -

80,000 135,000 x 30% 40,500 9|Page

c. Construct an extract Statement of Profit or Loss for the year ended 31 December 2014 taking into account the deferred tax calculated in (b) above. (Show the computation of taxation expense) (6 marks) Extract SOPL for the year ended 31 December 2014 RM 225,000

Profit before tax Less: tax expense Current tax exp Deferred tax exp

12,000** 40,500

**Profit before tax

225,000

add: depreciation

45,000

less: Cap allowance (100+50)

-

150,000

Development cost

-

80,000

Taxable profit

40,000

Tax expenses (x 30%)

12,000

- 52,500 172,500

Q7: Dec 2015 The Statement of Financial Position of Azim Bhd and the related tax based as at 31 December 2014 are as follows: Carrying Amount RM

Tax base

1,000,000 25,000

800,000 30,000

100,000 58,000 1,183,000

100,000 50,000

Equity Share capital Reserves

900,000 143,000

Not applicable Not applicable

Non-current liability Deferred tax liability (as at 1 January 2014)

100,000

100,000

40,000 1,183,000

0

Non-current assets Land and building Equipment Current assets Inventories Trade receivables

Current liability Provision for warranty

RM

10 | P a g e

Additional information: 1. The land was purchased at RM800,000. The entity expects to sell the land in three year time for RM1,800,000. 2. The tax rate is 25% and real property gain tax is 30%.

Required: a. Explain briefly the term deferred tax liability. (2 marks) A deferred tax liability is being the amount of income tax payable in future periods in respect of taxable temporary difference or tax that is payable in the future. b. Calculate the deferred tax for the year ended 31 December 2014. (4 marks)

CV RM

Tax base RM

Temporary Difference TTD DTD RM RM

Land & building

1,000,000

800,000

200,000

Equipment

25,000

30,000

Inventories

100,000

100,000

Trade receivables

58,000

50,000

Share capital

900,000

not applicable

Reserves

1,430,000

not applicable

Non-current liability Deferred tax liability (as at 1 Jan 2014)

100,000

100,000

Non- current asset

5,000

Current assets

8,000

Equity

Current libility Prov for warranty

40,000

-

40,000 208,000

45,000

11 | P a g e

Taxable temporary difference tax rate

163,000 x 25%

Deferred tax liability

40,750

c. Prepare journal entries to record the deferred tax. (1 mark) Dr. tax expense/profit or Loss 40,750 Cr. Deferred tax liability 40,750 d. Assuming on 1 December 2014, the government has increased and enacted the tax rate to 26% for accounting periods beginning on 1 January 2015 and hereafter. However, there is no change to the real property gain tax. Advise how the entity may handle the change of tax rate in accordance with MFRS 112 Income Taxes. ( 6 marks) According to MFRS 112, the deferred tax asset and deferred tax liability shall be measured af the tax rates that are expected to apply for the period when the asset is realized or the liability is settled. The change in tax rate will not affect the recognition rules for deferred tax liability. However, it will affect the measurement of the assets and liabilities. Therefore, the taxable temporary difference of RM163,000 will remain the same but the deferred tax liability is measured based on tax rates of 26% xRM163,000=RM42,380 Q8: Dec 2014 Separa Universe Bhd is a manufacturing company producing health products to be sold locally and also to to Asia Pacific markets. On 1 January 2008, the company acquired a building for RM1,800,000. The building has an estimated useful life of 30 years with no salvage value. It is the company’s policy to depreciate the building on straight-line basis. For tax purposes, an initial allowance of 10% and annual allowance of 5% is given on such buildings. Depreciation on the machine is provided at the rate of 20% per year based on the straightline method. The machine qualifies for capital allowance of 40% in the first year and 20% per year in the following years. On 1 January 2011, the building was revalued to RM2,040,000 and the revised remaining useful life after revaluation was 20 years. A new machine costing RM450,000 was also acquired as at that date. In complying wi...