Question

A. You are provided with the following information form the accounts of BBS Ltd for the year ending 30 June 2019

Cash Sales = 950 000 Cost of Goods Sold= 35 000 Amount received in advance for services to be performed in August 2019 = 9 500 Rent expenses for year ended 30 June 2019 = 9 000 Rent Prepaid for two months to 31 August 2019 =1 200 Doubtful debts expenses = 1 200 Amount provided in 2019 for employees’ long-service leave entitlements = 5 000 Goodwill impairment expenses = 7 000

Required: .Calculate the taxable profit and accounting profit for the year ending 30 June 2019.

B. GYV Ltd has the following deferred tax balances as at 30 June 2019.

Deferred tax asset = $9 00 000

Deferred tax liability = $7 00 000

The above balances were calculated when the tax rate, was 20 per cent. On 1 December 2019 the government raises the corporate tax rate to 25 per cent.

Required:

Provide the journal entries to adjust the carry-forward balances of the deferred tax asset and deferred tax liability.

Answer 1

A) Calculation of the taxable profit and accounting profit for the year ending 30 June 2019:-

Accounting Profit:-

Particular	Amount$
Cash Sales	$        950,000
Less: Cost of good sold	$           35,000
Gross profit	$        915,000
Less: Expense
Rent expense	$             9,000
Doubtful debts	$             1,200
Employee LSL(50% till june)	$             2,500
Goodwill impairment	$             7,000
Total Accounting profit	$        895,300

Taxable profit:-

Particular	Amount$
Accounting profit	$         895,300
Less: Employee LSL	$              2,500
Add: Amount received in advance	$              9,500
Less: Prepaid rent	$              1,200
Add: Doubtful debt	$              1,200
Taxable profit	$         902,300

b) Changes In Future Tax Rates

20% rate to 25%

Deferred tax assets and liabilities must be based on expected future tax rates - Generally, assume that current tax rate will continue into the future If the government changes the tax rate, the balances in DTA and DTL must be adjusted to reect the new rate, with the adjustment running through Income Tax Expense -

Here the Tax rate increase:

DTA will increase

Current deferred tax assets based on 20% =900000

If rate change to 25% = DTA = 900000 / 20% * 25% = 1125000

The DTA increased by $225000 ( 1125000 - 900000 )

Journal Entry:-

Particular	Debit	Credit
Deferred Tax Asset	$     225,000
Income Tax expense		$   225,000

DTL will decrease

Current deferred tax Liability based on 20% =700000

If rate change to 25% = DTA = 700000 / 20% * 25% = 875000

The DTL increased by $175000 ( 875000 - 700000 )

Journal Entry:-

Particular	Debit	Credit
Income Tax expense	$     175,000
Deferred tax liability		$   175,000