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

Answer-

A.

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

.

Calculate the accounting profit:
Particulars	Amount ($)
Cash sales	$950,000
Less: Cost of Goods sold	$35,000
Gross profit	$915,000
Less: Expenses
Rent expense	$9,000
Doubtful debts	$1,200
Amount paid for Employees LSL (50% upto June, 2019)	$2,500
Goodwill impairment expense	$7,000
Total accounts profit	$895,300

.

Taxable profit

Particulars	Amount ($)
Total accounts profit	$895,300
Less: Amount paid for Employees LSL (50%)	2500
Add : amount received in advance	9500
Less: Prepaid rent	1200
Add: doubtful debt exp	1200
Total Taxable profit	$902300

.

.

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 reflect 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

Accounts	Debit	Credit
Deferred Tax Asset	$225000
Income Tax Expense		$225000
(To record adjustment in tax rate)

.

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

Accounts	Debit	Credit
Income Tax Expense	$175000
Deferred Tax Liability		$175000
(To record adjustment in tax rate)