Question

Part a
JKL Ltd bought an item of equipment at $4 million on 1 January 2017, it had estimated life of 8 years and residual value at $800,000. The equipment was depreciated on straight line basis. However, the Inland Revenue Department does not allow depreciation as deductible expenses. Instead, tax expenses of this type of asset can be claimed against income tax in the year of purchase and 20% per annum (on reducing balance basis) of tax base thereafter. The rate of income tax was taken as 25 %.

Required
In respect of above items of equipment, calculate the deferred tax charge (i.e. tax expenses) or tax credit (i.e. tax benefit) in JKL Ltd’s books for the year ended 31 December 2019 through the journal entry.
Note: Extract of income statement is not required

Part b
Why did companies provide for deferred tax items in its financial statement?

Answer 1

Januray 01, 2017
4,000,000.00
Useful life is 8 Years
Salvage Value	800000
Depreciation for Year 2017 ended	4000000 - 800000/ 8 = 400000
Carrying Value	2017	2018	2019
Carrying Value for Decemebr Ended ( SLM)	3,600,000.00	3,200,000.00	2,800,000.00
Carrying Value for Decemebr Ended ( WDV)	3,200,000.00	2,560,000.00	2,048,000.00
Depreciation	2017	2018	2019
Depreciatin indr WDV	800000	640000	512000
Depreciation in SLM	400,000.00	400,000.00	400,000.00
Differenc of Depreciation ( As per Books and As per IRS)	(112,000.00)
Here Charging more Depreciation and Paying less tax today will lead to more taxes in Furture as less deduction in depreciation. DTL shall be booked on 112000 * 25% = 28000
Company provie for Deferred tax item due to timming difference arises due to treatment in Books and IRS standards of treartment over allowance of any deduction .