Question

KGB Security Ltd provides the following information at 30 June 2019 (the first year of operation of the company)

Statement of Financial Position (Balance Sheet)

As at 30 June 2019

Assets	$000	Liabilities and owner’s equity	$000
Prepayments	20	Provision for Annual Leave	90
Accounts Receivable	360	Loan	320
Allowance for Bad Debts	(40)	Share Capital	1,600
Inventory	600	Retained Earnings	330
Plant and Equipment	1,800
Accum Depreciation	(400)
	2,340		2,340

Other Information:

• For the year ended 30 June 2019 the company made a net profit before tax of $500,000. Dividends of $170,000 were paid.
• Temporary differences include:

• Annual Leave – no payments made during the year
• Depreciation of Plant and Equipment for tax purposes $360,000
• Bad Debts written off $10,000 (against Allowance for Bad Debts)
• Prepayments (Previously paid in cash)

• Included in expenses for the year is entertainment expenses of $6,000.
• Assuming a tax rate of 30%.

Required:

1. Calculate the current tax liability at 30 June 2019.
2. Calculate the amount of deferred tax assets/liabilities at 30 June 2019.
3. Journal entry to record income tax for the year.

Answer 1

A. Calculate the current tax liability at 30 June 2019

.

For calculating current tax liability,we need to find Taxable income.

So, Income before tax under book should reconcile to Taxable income

.

Net profit before tax Under Book	$500000
Adju. To to reconcile to Taxable income:
Add: Provision for Annual Leave (future deductible)	$90000
Add: Extra deprecation deducted ( 400000-360000)	$40000
Add: estimated bad debt exp. For future	$30000
Less: prepayment	($14000)
Taxable Income	$646000

.

estimated bad debt exp. For future =

Estimated bad debt = 40000

Current year written off = 10000

Under book income $40000 are deducted, for tax purpose can only deduct $10000, and remaining is future deductible, should add with income under book to reach taxable income

.

Prepayment = is fully deductible for tax purpose, however on 6000 are deducted under book, so need to deduct remaining amount of $14000 (20000 - 6000 ) from book income to calculate taxable income.

.

The tax liability is calculated based on taxable Income

.

Tax Liability = Taxable income * tax rate

Tax rate = 30%

.

Tax Liability = 646000 * 30% = $193800

.

B. Calculate the amount of deferred tax assets/liabilities at 30 June 2019.

.

The Amount of deferred tax assets/liabilities

.

		DTA=Difference * tax rate	DTL=Difference * tax rate
Provision for Annual Leave (future deductible)	$90000	90000 *30% =27000
Extra deprecation deducted ( 400000-360000) (future deductible)	$40000	40000*30% =12000
estimated bad debt exp. (future deductible)	$30000	30000*3% =9000
prepayment	($14000)		14000*30% =4200
Total		48000	4200

.

Deferred Tax Assets = 48000

Deferred Tax Liability = 4200

Net Deferred tax Assets = 48000 - 4200 = 43800

.

C. Journal entry to record income tax for the year

.

Income tax expenses = Book income * tax rate = 500000 * 30% = 150000

Income tax payable = Taxable income * Tax rate = 646000 * 30% = 193800

.

Difference is Deferred Tax assets = $43800

.

Journal entry

Account & Explanation	Debit	Credit
Income tax expenses	$150000
Deferred Tax assets	$43800
Income tax payable		$193800
(To record tax expenses)