Mini Case 3 Deferred Tax A211 PDF

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BKAF 3033 FINANCIAL ACCOUNTING AND REPORTING III A211 MINI CASE 3: DEFERRED TAX SUBMISSION DATE: 26/12/2021 QUESTION 1 Lynida is a new accountant for Niendra Engineering Bhd. She is concerned about the company’s income statement that reports income tax expense which is different from the income tax obligation to the government for the year 2020. She is also uncertain which differences should be included in the determination of deferred tax for 2020. Lynida is provided with two items that are relevant to the decision. The first item is RM70,000 non-tax deductible insurance premium the company pay annually for the CEO’s life insurance policy for which the company is the beneficiary. The second item is that Niendra Engineering Bhd purchased a building on 1 January 2020 for RM12,000,000. The building’s estimated useful life is 10 years from the date of purchase with no salvage value. Depreciation computed using the straight-line method for financial reporting purposes and the capital allowance for the building is 30% in the first year including both initial allowance and annual allowance. Assume tax rate is 24%.

REQUIRED: (a)

Explain why the amount of income tax expense in Niendra Engineering Bhd’s income statement is not equal with the amount of income tax obligation to the government.

(b)

Discuss the difference between temporary and permanent difference. Give ONE (1) example for temporary and permanent differences based on the information in Niendra Engineering Bhd.

(c)

Calculate the deferred tax as at 31 December 2020 for Niendra Engineering Bhd and specify whether it is deferred tax assets or deferred tax liability.

(d)

Assume that on 31 October 2020, the Malaysian Government enacted that corporate tax rate is reduced to 21% for year assessment of 2021 onwards. Discuss how this affects net deferred tax. Calculate the adjusted net deferred tax.

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QUESTION 2 Wawasan Bhd is one of the main manufacturers and suppliers of industrial chemical products and equipment that had been incorporated in 2001. The following is the carrying amount of asset and liabilities of the company as at 31 December 2020: Property, plant and equipment Intangible assets Investment in fixed deposit Account receivable Interest receivable Inventory Bank Trade payables Accrued interest Penalties payable Unearned revenue 10% Loan

Carrying amount (RM) 249,200 138,000 107,000 96,700 10,700 206,000 129,000 197,000 15,600 15,500 45,300 156,000

Additional information: 1. 2.

3.

4. 5. 6.

The balance of deferred tax liability on 1 January 2020 was RM8,500. The tax rate for the assessment year 2020 was 24%. The cost of the property, plant and equipment is RM356,000 when it was acquired in 2018. Depreciation expense for property, plant and equipment is calculated at the rate of 10%. Initial allowance is 20% and annual allowance is 10%. Both of capital allowances is calculated based on the cost of the assets. The intangible assets consist of development expenditure of Wawasan Bhd’s R&D project incurred during the year that was qualified to be capitalised. No amortization is allocated during the year. Interest receivable is interest revenue earned from the investment in fixed deposit. Meanwhile, interest expense was incurred due to a 10% loan from a financial institution. Unearned revenue is payment received under a Wawasan Bhd’s policy that require new clients to make advance payments before the delivery of goods is made to them.

REQUIRED: (a)

(b) (c)

Determine the tax base of asset and liabilities for Wawasan Bhd and calculate the temporary difference as of 31 December 2020. Indicate whether the temporary difference is taxable or deductible. Compute the deferred tax expenses for 2020. Explain the effect on the computation of deferred tax expense if the tax rate for the assessment year 2020 differs from the tax rate for the assessment year 2019. Calculate the adjusted deferred tax expense of Wawasan Bhd assuming that the tax rate used in 2019 was 22%. 2

QUESTION 3 Diandra Bhd recognised a deferred tax liability for the year ended 31 December 2019 which is related solely to a difference between rates of capital allowance and depreciation. The carrying amount of plant and equipment was RM30,000,000 and tax base was RM20,000,000. The following transaction took place during 2020: 1.

During the year, plant was revalued and surplus was RM6,000,000. At the end of the year, the carrying amount of plant was RM42,000,000 and tax base was RM25,000,000. Gains on revaluation are taxable on sale at 20%.

2.

Development expenditure of RM12,000,000 was capitalised in accordance with MFRS 138 but is deducted for tax purpose. There was no amortisation during the year.

3.

Diandra Bhd has recognised income receivable of RM2,000,000 but none has been received yet.

4.

Diandra Bhd has made provision for environment clean-up of RM1,000,000. The expenditure will be tax deductible when paid only.

5.

The trade receivables were disclosed at RM3,500,000 after providing for doubtful debts of RM250,000.

6.

The tax payable for the year was calculated at RM3,300,000.

7.

Corporate tax rate for 2019 and 2020 were 24%.

REQUIRED: (a)

Prepare a table showing the carrying amounts tax base and temporary differences for each of the items as at 31 December 2020.

(b)

Calculate the amount of tax expense as charged in the Statement of Profit or Loss and Other Comprehensive Income and the amount disclosed in the deferred tax liability in the Statement of Financial Position as at 31 December 2020.

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QUESTION 4 Futurecare Bhd, which began operation in 2016, sells electrical goods in Malaysia. The carrying amount of asset and liabilities of Futurecare Bhd as at 31 December 2020 are as follow: Carrying Amount (RM) Property, plant and equipment 170,000 Investment properties 50,000 Research and development 30,000 Accounts receivable 20,000 Prepaid insurance 5,000 Inventory 20,000 Bank 40,000 Interest receivable 8,000 Interest payable 3,000 Penalties payable 20,500 Provision for warranties 18,000 Deferred tax payable as at 1 January 5,000 Unearned rent 16,000 Additional information: 1.

2.

3. 4. 5. 6. 7. 8. 9.

Property, plant and equipment including the following items: (i) Motor vehicles acquired on 1 January 2019 for RM100,000 with a useful life of 10 years. Initial allowance is 20% and annual allowance is 10% per year. (ii) Machinery acquired on 1 January 2018 for RM120,000 with a useful life of 12 years. Initial allowance is 20% and annual allowance is 14% per year. (iii) Futurecare Bhd. uses straight line method to calculate depreciation expense for property, plant and equipment. Research and development refers to development cost that was capitalized in 2018 and being amortised. Current tax law allows all research and development costs to be written off immediately in computing taxable profit. Amortization in 2020 was RM5,000. Interest receivable is interest earned on investment in government bond. Prepaid insurance is payment for 2021 insurance coverage. Penalties payable is related to the fines charged to Futurecare Bhd. for violation of pollution laws. Interest payable is due to interest payment for 2020 which is not yet paid. Unearned rent is for 2021 rental from investment properties which is received in advanced. Futurecare Bhd. provides for warranties on goods sold. In year 2020, none of goods are returned for repairs. Corporate tax rate for 2020 is 24%.

REQUIRED: (a) Determine the tax base of asset and liabilities for Futurecare Bhd. and calculate the temporary difference by specifying whether the differences are deductible temporary differences or taxable temporary differences (b) Calculate the deferred tax expense (amount charged in the statement of comprehensive income) for 2020. (c) Explain the difference between deferred tax assets and deferred tax liabilities. 4...