Question

Rose Ltd purchased equipment on 1 July 2011 at a cost of $25 000. The equipment had an expected econ- omic life of five years and was to be depreciated on a straight-line basis. The taxation depreciation rate for equipment of this type is 15% p.a. straight-line. On 30 June 2013, Rose Ltd reassessed the remaining econ- omic life of the equipment from 3 years to 2 years, and the accounting depreciation charge was adjusted accordingly. The equipment was sold on 30 June 2014 for $15 000. The company tax rate is 30%.

Required

For each of the years ended 30 June 2012, 2013 and 2014, calculate the carrying amount and the tax base of the asset and determine the appropriate deferred tax entry. Explain your answer.

Answer 1

	CALCULATIONS:
		Details	Accounting Dep.
	Cost June 2011		$         25,000
	Less: Depreciation	=25000/5	$            5,000
	Book Value 30 June, 2012		$         20,000
	Less: Depreciation		$            5,000
	Book Value 30 June, 2013		$         15,000
	Less: Depreciation(Revised)	=15000/2	$            7,500
	Book Balue 30 June, 2014		$            7,500
		Details	Tax Dep.
	Tax Basis 2011		$         25,000
	Less: Depreciation	=25000*15%	$            3,750
	Tax Basis 30 June, 2012		$         21,250
	Less: Depreciation		$            3,750
	Tax Basis 30 June, 2013		$         17,500
	Less: Depreciation(Revised)	=15000/2	$            3,750
	Tax Basis 30 June, 2014		$         13,750
		Carrying Amount	Tax Basis	Difference	Deferred Tax Asset/ (Deferred Tax Liability)@30%
	30-Jun-12	$ 20,000	$         21,250	$       1,250	$ 375
	30-Jun-13	$ 15,000	$         17,500	$       2,500	$ 750
	30-Jun-14	$ 7,500	$         13,750	$       6,250	$ 1,875
	Calculation of Gain on Sale
		Carrying Amount	Tax Basis	Difference	Deferred Tax Asset/ (Deferred Tax Liability)@30%
	30-Jun-14	$ 7,500	$         13,750	$       6,250	$ 1,875
	Sale Value	$ 15,000	$         15,000	$ -
	Gain	$ 7,500	$            1,250	$     -6,250	$ -1,875
	Since, Depreciation as per Accounting Provisions Is greater than Tax Provisions, hence higher income as per Tax Provisions than Accounting Provisions. Therefore, higher tax will have to be paid. Since it is temporary difference, the same will be reversed in future years, hence deferred tax asset will have to be recorded.
	On 30 June, 2014, when the Asset is sold, any deferred tax liability or asset have to be reversed related to the same.
	Journal Entry:
Date	Accounts		Dr Amount	Cr Amount
30-Jun-12	Deferred Tax Asset A/c(30% of $1250)		$               375
		To St. of Profit and Loss A/c		$ 375
	(being deferred tax asset booked )
30-Jun-13	Deferred Tax Asset A/c($750-$375)		$               375
		To St. of Profit and Loss A/c		$ 375
	(being deferred tax asset booked )
30-Jun-14	St. of Profit and Loss A/c		$               750
		To Deferred Tax A/c		$ 750
	(earlier Deferred Tax Asset reversed)