Question

On 1 January 2008, a company bought plant at a price of $500 000. The

plant was to be depreciated using the straight line method over its

useful life of 5 years (after which it was estimated that it would have no

residual value).

For tax purposes, wear and tear is allowed on the following basis:

50% in the first year

30% in the second year

20% in the third year

On 31 December 2011 the plant was sold for $100 000. The profit before

tax for 2010 was $120 000 and for 2011 $150 000. The tax rate was

30% from 2008 to 2011.

Required

a) Calculate temporary differences and deferred tax asset/ liability for the

years 2008 to 2011, clearly indicating the debits/credits to the deferred

tax account.

b) Calculate the taxable income and current income for 2010 and 2011

Answer 1

a)
Deferred Tax
	Carrying Amount	Tax Base	Temporary Difference	Deferred Tax Liability (Dr.) Cr.	Income Statement Dr (Cr.)
2008	$                                             400,000	$      250,000	$         150,000	$     45,000	$     45,000
2009	$                                             300,000	$      100,000	$         200,000	$     60,000	$     15,000
2010	$                                             200,000	$                -	$         200,000	$     60,000	$            -
2011					$   (60,000)
b)
		2011	2010
	Profit Before Tax	$ 150,000.00	$    120,000.00
	Profit on sale for Accounting Purpose	-	-
	Depreciation for Accounting Purpose	$ 100,000.00	$    100,000.00
	Recoupment forTax Purpose	$ 100,000.00
	Wear and Tear		$  (100,000.00)
	Taxable Income	$ 350,000.00	$    120,000.00
	Current tax Expenses @ 30%	$ 105,000.00	$      36,000.00