Question

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 board providing advice on the raising of a deferred tax asset and 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

Answer 1

Their are differences between entries for financial accounting and entries for income tax laws to calculate profit . Hence these differences create deffered tax liabilities and deffered tax assets .

These differences are created because of

1) Timing of revenue / expense recognition are different on income statement and tax statement

2) Some revenue / expense are recognised in income statement but never recognised on tax statement or vice - versa

3) Diffrent tax base for asset or liability

Answer 2

Deferred tax assets

Deferred tax asset is created when tax payable ( taxable profit) is greater than income tax expense (income statement). Some of entries which can create deferred tax asset are as below

1) Depreciation - If different deprication methods are followed for tax and for financial reporting . For income tax purpose asset may be depriciated at higher rate hence creating deferred tax asset

2) Research and development - If R&D cost are capitalised for tax purpose and expensed on income statement it creates deferred tax asset

3) Accounts receivable - If firm recognises bad debt expense earlier from account receivable than tax purpose where bad debt expense cannot be deducted until receivables are deemed worthless

Answer 3

Taxable income

Entries	Amount
Accounting Loss	-10,000,000
Expense	-8,000,000
Good will impairment loss	-1,000,000
Entertainment cost	-500
Depreciation expense – plant	-2,000,000
Long-service leave expense	-1,200,000
Total loss	-22,200,500

Answer 4

Entries for deferred tax asset

Entries	Amount	Explanation
Goodwill impairment	1000000	Not considered for tax purpose
Entertainment cost	500	Not considered for tax purpose
Depreciation expense – plant	2,000,000	=(4000000 - 2000000) excess of tax paid over income tax
Long-service leave expense	1,200,000	=(2400000 - 1200000) excess of tax paid over income tax
Total	4,200,500