Question

Accounting for company income tax

Grace Timber Ltd (GTL) is engaged primarily in agricultural pursuits as well as in forestry products, including the management of its own forest reserves. Unfortunately, in the current year a bushfire in the mountain range bordering the company’s operations resulted in the destruction of 5 000 hectares of standing timber, harvested logs, forestry buildings and equipment. As a result the company recognised a $10 million loss in the current period. The board of directors of GTL are debating whether it can raise a deferred tax asset in relation to this loss in the financial statements for the current period.

The accounting profit and other relevant information of GTL for the year to 30 June 2019 are as follows:

Accounting profit (loss) After debiting as expense:   Goodwill impairment loss*   Entertainment costs*   Donation to political party*   Depreciation expense – plant   Long-service leave expense For tax purposes:   Tax depreciation for plant   Long-service leave paid *These items are non-deductible for tax purposes.			$(10 000 000) 8 000 000 1 000 000 500 000 2 000 000 1 200 000 4 000 000 2 400 000

The company tax rate is 30%.

The Chief Executive Officer (CEO) of GTL instructed the Chief Financial Officer (CFO) to submit a report to the boardproviding advice on the raising of a deferred tax assetand specifying the conditions, if any, under which the asset could be recognised.

Required

1. Explain how accounting profit and taxable profit differ and how each is treated when accounting for income taxes.                                                                                        

2. Discuss when a deferred tax asset must be recognised.                                

3. Calculate the taxable income.                                                                                   

4. Prepare the journal entry for the deferred tax asset.                                     

Answer 1