Question

The managing director of Small Ltd has asked you to calculate the taxable income for 30/6/2017 and prepare the journal entry to record current tax liability based on the data below. Assume tax rate is 30% Accounting Profit before tax $ 60 000 After debiting the following Expenses: Entertainment costs * 6 500 Goodwill impairment loss * 8 000 Fines and Penalties * 10 000 Depreciation on equipment 11 000 Annual Leave expense 5 000 Warranty expense 6 000 For tax purposes: Tax depreciation on equipment 22 000 Annual Leave paid 7 500 Warranty paid 8 000 • These items are non-deductible for tax purposes Required 1. Calculate current tax liability? 2. Prepare the journal entry to record income tax expense?

Answer 1

Solution:

Part 1.

Particulars	Amount in $
Pre-tax Accounting Profit	60,000
Add: Entertainment costs	6,500
Add: Goodwill impairment loss	8,000
Add: Fines and penalties	10,000
Add: Depreciation on equipment	11,000
Add: Annual leave expense	5,000
Add: Warranty expense	6,000
Less: Income Tax Depreciation	(22,000)
Less: Annual leave paid	(7,500)
Less: Warranty paid	(8,000)
Taxable Income	69,000
Taxable Income	69,000
Tax payable @ 30%	20,700
Income after tax	48,300

DTA / DTL Calculation
Expense as per accounting
Depreciation	11,000
Annual Leave	5,000
Warranty	6,000
Total	22,000
Expenses As per Taxation
Depreciation	22,000
Annual Leave	7,500
Warranty	8,000
Total	37,500
Timing difference (Taxation - Accounting)	15,500
Taxation expense is higher so DTL create
DTL @ 30%	4,650
Deferred tax liability	4,650
Tax expense for the year
Tax payable	20,700
Deferred tax liability	4,650
Total	25,350

Part 2.

Accounting Entry
Accounts title	Debit	Credit
Tax expense	25,350
Tax payable		20,700
Deferred tax liability		4,650