Question

Q.4.2

In the 2020 fiscal year, Company B reported an accounting profit of $1,000. In the same year, the accounting depreciation expense for plant was $150, while the tax deduction for plant depreciation was $200. There was no other difference between accounting and tax in the year. In the 2019 fiscal year, the company recorded a tax loss ($300) and recognized a deferred tax asset in respect of this tax loss. In the 2020 fiscal year, the company reduced the taxable profit by recouping the tax losses carried forward. The company does not set off deferred tax liabilities and assets. The corporate tax rate is 30%.

1. Required: Provide the journal entries for the current tax adjustment. Workings (or narrations) are not required.

2. Now assume that Company B’s accounting profit in the 2020 fiscal year includes $55 of government grant which is exempt from tax. Also, assume that tax losses carried forward must be offset against any exempt income before being used to reduce taxable profit.

Required: Under these additional assumptions, provide the journal entries for the current tax adjustment. Workings (or explanations) are not required.

Answer 1

I have provided journal entires with relevant workings

Answer to option (a)
Sr No	Particulars	Debit	Credit		Working
1	Current Tax Expense A/c	195			Accounting Profit
	To Provision for Tax(Tax Payable)A/c		195		Depreciation in Accounting
	(650*30%)				Depreciation in Tax
2	Deferred Tax Expense A/c	90			Asset base will be more in Accounting, Hence DTL will be created.
	To Deferred Tax Asset A/c		90
	(300*30%)				Hence, Total Tax expense recognised is (195+90+15)
3	Deferred Tax Expense A/c	15
	To Deferred Tax Liability A/c		15

Answer to option (b)
Sr No	Particulars	Debit	Credit
1	Current Tax Expense A/c	195
	To Provision for Tax(Tax Payable)A/c		195
	((1000-55-245-50)*30%)
2	Deferred Tax Expense A/c	73.50
	Profit & Loss A/c	16.50
	To Deferred Tax Asset A/c		90.00
	(245*30%)
3	Deferred Tax Expense A/c	15
	To Deferred Tax Liability A/c		15

Thanks