Tax Effect Solutions PDF

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Tax effect Question 1 Solution Calculate the current and deferred tax of Rich Ltd for 2015 and prepare the required tax journal entries for each year. Current Tax Worksheet for the year ended 30 June 2015

Accounting profit

$1 200 000

Add: Warranty expense

500 000

Depreciation expense - plant

20 000

520 000 1 720 000

Deduct: Tax depreciation - plant

30 000

Taxable profit

(30 000) 1 690 000

Current tax liability @ 30%

$507 000

Deferred Tax Worksheet as at 30 June 2015

Asset Plant Liability Provn for warranty

Carryin g Amount

Deductible Amount

Tax Base

Taxable Temp Diff

80 000

70 000

70 000

10 000

500 00 0

500 000

0

500 000 10 000 3 000

DTL (30%) DTA (30%) Beginning balance Increase

Deductible Temp Diff

500 000

0

150 000 0

$ 3 000

$ 150 000

The journal entry for current tax for the year to 30 June 2015 is: Income Tax Expense Current Tax Liability

Dr Cr

507 000 507 000

The journal entry for deferred tax for the year to 30 June 2015 is: Deferred Tax Asset

Dr

150 000

Deferred Tax Liability

Cr

3 000

Income Tax Expense

Cr

147 000

In the 30 June 2015 financial statements:  Income tax expense for the year $360 000 ($507 000 – $147 000)  Current tax liability $507 000  Deferred tax liability $3 000  Deferred tax asset $150 000

Tax Effect Question 2 Solution Required Calculate the current and deferred tax of Rich Ltd for 2016 and prepare the required tax journal entries for each year. Current Tax Worksheet

for the year ended 30 June 2016 Accounting profit

$1 500 000

Add: Depreciation expense - plant

20 000

20 000 1 520 000

Deduct: Warranty paid

250 000

Tax depreciation - plant

30 000

(280 000)

Taxable profit

1 240 000

Current tax liability @ 30%

$ 372 000

Deferred Tax Worksheet as at 30 June 2016

Carryin g Amount

Deductible Amount

Tax Base

Taxable Temp Diff

Asset Plant

60 000

40 000

40 00 0

20 000

Liability Provn for warranty

250 00 0

250 000

0

250 000 20 000 6 000

DTL (30%) DTA (30%) Beginning balance Increase/(Decrease)

Deductible Temp Diff

250 000

3 000

75 000 150 000

$ 3 000

$ (75 000)

The journal entry for current tax for the year to 30 June 2016 is: Income Tax Expense Current Tax Liability

Dr

372 000

Cr

The journal entry for deferred tax for the year to 30 June 2016 is:

372 000

Income Tax Expense

Dr

78 000

Deferred Tax Liability

Cr

3 000

Deferred Tax Asset

Cr

75 000

In the 30 June 2016 financial statements:  Income tax expense $450 000 ($372 000 + $78 000)  Current tax liability $372 000  Deferred tax liability $6 000

($3 000 + $3 000)

 Deferred tax asset $75 000

($150 000 – $75 000)

On 1 July 2014, Rich Ltd was incorporated. The accounting profit and other relevant information of Rich Ltd for 2017 are as follows:

2017 Profit before tax

$1 800 00 0 20 000

Depreciation expense – plant Gain on sale accounting Warranty paid

of

plant

for

22 000 250 000

Tax depreciation – plant

30 000

Gain on sale of plant for tax

52 000

The company tax rate is 30%. Current Tax Worksheet For the year ended 30 June 2017 Accounting profit

$1 800 000

Add: Depreciation expense - plant

20 000

Gain on sale for tax

52 000

72 000 1 872 000

Deduct: Warranty paid

250 000

Tax depreciation - plant

30 000

Gain on sale for accounting

22 000

302 000

Taxable profit

1 570 000

Current tax liability @ 30%

$ 471 000

Deferred Tax Worksheet as at 30 June 2017

Carryin g Amount

Deductible Amount

Tax Base

Taxable Temp Diff

0

0

0

0

0

0

0

Asset Plant Liability Provn for warranty

Deductible Temp Diff

0 0 0

DTL (30%) DTA (30%) Beginning balance Increase/(Decrease)

0

6 000

0 75 000

$(6 000)

$ (75 000)

The journal entry for current tax for the year to 30 June 2017 is: Income Tax Expense

Dr

Current Tax Liability

471 000

Cr

471 000

The journal entry for deferred tax for the year to 30 June 2017 is: Income Tax Expense

Dr

69 000

Deferred Tax Liability

Dr

6 000

Deferred Tax Asset

Cr

75 000

In the 30 June 2017 financial statements:  Income tax expense $540 000 ($471 000 + $69 000)  Current tax liability $471 000  Deferred tax liability $0  Deferred tax asset $0

($6 000 – $6 000) ($75 000 – $75 000)

The total of the income tax expense and income tax paid for the three years is as follows: Income tax expense

Current tax liability (Tax paid for year)

30 June 2015

360 000

507 000

30 June 2016

450 000

372 000

30 June 2017

540 000

471 000

$1 350 000

$1 350 000

In aggregate the income tax expense and income tax paid across the three years is equal because by the end of 30 June 2017, there are no outstanding temporary differences, that is, the temporary differences for plant and the provision for warranty have reversed in full.

Note how the origination of the deductible temporary difference for the provision reduces income tax expense for 30 June 2015. Then note how the reversal the deductible temporary difference for the provision increases income tax expense for 30 June 2016 and 30 June 2017.

The totals for income tax expense and income tax paid highlight how accounting for income tax is itself an application of accrual accounting. The expense is not based on the income tax to be paid for the period but the current and deferred tax that arises in the period....