Question

Jaguar Ltd purchased a machine on 1 July 2016 at a cost of $640,000. The machine is expected to have a useful life of 5 years (straight line basis) and no residual value. For taxation purposes, the ATO allows the company to depreciate the asset over 4 years. The profit before tax for the company for the year ending 30 June 2017 is $600,000. To calculate this profit the company has deducted $60,000 entertainment expense, and $80,000 salary expense that has not yet been paid. Also the company has included $70,000 interest as income that the company has not yet received. The tax rate is 30%. Required: (i) Calculate the company’s taxable profit and hence its tax payable for 2017. (ii) Determine the deferred tax liability and/or deferred tax asset that will result. Prepare the necessary journal entries at 30 June 2017.

Answer 1

(i)

Current Taxable Profit Calculation is as follow:
PBT June Ended 2017	600000
Add: Expenses not actually Paid off
Entertainment Expenses	60000
Salary Expenses	80000
Depreciation Expenses as per Books	128000
Less: Depreciation Expenses Allowed as per Tax	-160000
Interest Income	-70000
Taxable Profit	638000
Hence Current Tax = 638000 X 30% = 191400

(ii)

Difference
Entertainment Expenses : 60000 DTA
Salary Expenses : 80000 DTA
Depreciation : 32000 DTL
Interest Income accrued: 70000 DTL
Hence, 60000+ 80000 - 32000 = 38000 X 30% = 11400 DTA

Working Notes:

Machine Purchased : 640000
Book Useful life is = 5 years
Depreciation Method is SLM
Hence Depreciation as per Books = 640000/ 5 = 128000 Deductible from Books Profit
As per Tax Regulators.
Useful Life is = 4 Years
Depreciation Method is Common as SLM.
Hence Depreciation as per Tax Regulator = 640000/ 4 = 160000
Expenses not Allowed as per tax regulators
Entertainment Expenses: 60000
Salary Expenses: 80000
Depreciation Allowable : 160000
Ineterst is taxable on receipt basis

Items	Values	DTA /DTL	Explanation
Entertainment Expenses	60000	DTA	AS , same is disallowed today under Income Tax and such benefit is allowable on payment basis, hence deductible in nature, DTA.
Salary Expenses	80000	DTA	AS , same is disallowed today under Income Tax and such benefit is allowable on payment basis, hence deductible in nature, DTA.
Depreciation	32000	DTL	Here, charging extra depreciation today, hence in future more tax will be paid as depreciationas per tax will be charged earleir as compared toa ccounting book.Hence taxible, DTL i.e 160000 - 128000 = 32000
Interest Income	70000	DTL	here, Interest income is not charged to tax today but same will be taxable in future itself, DTL

Hence Current Tax = 638000 X 30% = 191400
Deferred Atx Asssts 11400
Total Tax = 191400 -11400 = 180000
Accounting Description	Debit	Credit
Current Tax Account Dr.	180000
Deferred Tax Account Dr.	11400
To Provision of Tax A/c		191400
( Being entry for Tax Provision)