Question

For the year ended 30 June 2018, Alexander Ltd recognised a liability ‘revenue received in advance’ of $18 000. This revenue was assessable in the year ended 30 June 2018.

Required

(a) What is the carrying amount of the liability on 30 June 2018?

(b) What is the tax base of the liability on 30 June 2018?

(c) If the tax rate is 30%, what would be the deferred tax asset or liability associated with this liability on 30 June 2018?

(d) How would your answers to (a), (b) and (c) above be different if the revenue was assessable in the 2018/2019 financial year?

Answer 1

If revenue was assesable in 2018 for tax purpose :

a) Carrying amount of the liability on 30 June 2018 is $ 18,000 in the books of accounts as this is revenue received in advance. It will be recognized in books as & when the services are rendered or goods, risk & rewards are transferred to buyer.

b) Tax imlication will come as & when we recognize this as income in the books of Alexander ltd.

c) Deferred tax asset to be created with respect of this in the books of accounts as in companies books we are showing it as liability & not income but for taxation we are considering this as income. DTA amount will be $18,000 x 30% = $5400

If revenue was assessable in 2019 :

a) Carrying amount of the liability on 30 June 2018 is $ 18,000 in the books of accounts as this is revenue received in advance. It will be recognized in books as & when the services are rendered or goods, risk & rewards are transferred to buyer.

b) Revenue will not be considered for tax purpose as it will be assessable in 2019.

c) Deffered tax liability will have to be created as we are postporning the income by showing it as advance. DTL will be $ 5400