Question

Part (A)

As at year ended 31 March 2019, the total carrying value of property, plant and equipment on the statement of financial position of Candy Limited was $720,000. The current assets as at year ended 2019 included interest receivable of $10,000. The related interest revenue would be taxed on a cash basis.

Property, plant and equipment included furniture and computer equipment. Furniture was acquired on 1 April 2016 at a cost of $800,000. The company purchased the computer equipment during the year 2019 for $600,000.

It is Candy Limited’s accounting policy to measure its property, plant and equipment at cost less accumulated depreciation. Accounting depreciation is provided on a straight-line basis over the useful life of the asset:

Furniture 5 years Computer Equipment 3 years

Full year depreciation will be provided for in the year of purchase and nil residual value is assumed.

As at 31 March 2018, the balances of deferred tax accounts in the statement of financial position were:

Deferred tax asset $16,000 (coming from tax losses carried forward) Deferred tax liability $96,000

As at 31 March 2019, tax depreciation of $800,000 had been allowed for furniture. The tax authority allows full deduction on the cost of any computer equipment in the year of purchase. For the year ended 31 March 2019, a tax loss of $40,000 was computed. All tax losses will be allowed to set off the future profits for tax purpose. As at 31 March 2019, the management estimated the taxable profits for the forthcoming years as follows:

2020
2021
2022 and beyond

$50,000 $40,000

No estimation is available The announced income tax rates for 2018 and thereafter was 20%.

5

Required:

(a) Prepare a table showing the temporary differences (1) furniture (2) computer equipment (3) interest receivable, with the following column headings as at 31 March 2019:

Carrying Deductible temporary Taxable temporary Item amount Tax base difference difference

[6 marks]

(b) Compute the deferred tax asset / liability related to (1) furniture (2) computer equipment (3) interest receivable for the year ended at 31 March 2019. [2 marks]

(c) Provide accounting entries for the adjustments of the deferred tax asset / liability for the year of 2019. Show your workings. Narratives are not required. [5 marks]

Part B

Sea Ltd. commenced its business in 2019. The company incurred a tax loss of $150,000 for the year ended 31 December 2019. It is expected that the company will not incur losses again and will be able to generate future taxable profits of $160,000. The tax rate for 2019 and thereafter is 30%.

Required:

(a) Provide the journal entries to record deferred tax regarding the tax loss in year 2019.

[2 marks]

(b) Assume the actual taxable profit for the year ended 31 December 2020 is $40,000 and the management of the company based on new information estimates the future taxable profits as $90,000 on 31 December 2021. Prepare the relevant journal entries for the year 2020.

Show all workings. Narratives are not required.

Answer 1

Answer (a) Table showing the temporary differences:                                                                     (in $)

S.No.	Particulars	Carrying Amount	Tax Base	Taxable temporary Difference (Carrying Amount-Tax Base)	Deductible temporary difference
1.	Furniture	320,000 (W.N.1)	0 (W.N.2)	320,000	-
2.	Computer Equipment	400,000 (W.N.3)	0 (W.N.4)	400,000	-
3.	Interest Receivable	10,000 (W.N.5)	0	10,000	-
	Total	730,000	0	730,000

W.N. 1

Calculation of carrying amount of furniture as at year ended 31 March 2019:

Particulars	Calculation	Amount (in $)
Cost on 1 April 2016		800,000
Less: Depreciation for three years from Apr 2016 to Mar 2019	800,000/5 =160,000 =160,000*3	(480,000)
Carrying Amount on 31 March 2019		320,000

W.N.2

Since, on 31 March 2019, tax depreciation of $800,000 had been allowed for furniture, no amount is deductible in the future regarding furniture. Thus, the tax base of furniture would be nil.

W.N.3

Calculation of carrying amount of furniture as at year ended 31 March 2019:

Particulars	Calculation	Amount (in $)
Cost in 2019		600,000
Less: Depreciation for the year	600,000/3	(200,000)
Carrying Amount on 31 March 2019		400,000

W.N.4

Since, the tax authority allows full deduction on the cost of any computer equipment in the year of purchase; no amount is deductible in the future regarding computer equipment. Thus, the tax base of computer equipment would be nil.

W.N.5

The related interest revenue will be taxed on a cash basis. The tax base of the interest receivable is nil.

Answer (b)

Computation of deferred tax asset/liability for the year ended on 31 March 2019:

(in $)

S.No.	Particulars	Taxable temporary Difference (Carrying Amount-Tax Base)	Tax Rate	Deferred tax asset / (Deferred tax liability)
1.	Furniture	320,000	20%	(64,000)
2.	Computer Equipment	400,000	20%	(80,000)
3.	Interest Receivable	10,000	20%	(2,000)
	Total	730,000		(146,000)

Deferred tax liability for the year ended on 31 March 2019 is $146,000

Answer (c)

Accounting entries for the adjustments of the deferred tax asset/liability for the year of 2019:

                                                                                                                                                                  (in $)

Date	Particulars	Debit	Credit
2019
March 31	Profit and loss A/C DR.	16,000
	To Deferred Tax Asset A/C		16,000
	(Being Deferred tax asset reversed)
March 31	Profit & Loss A/C                                                                 DR.	146,000
	To Deferred tax liability A/C		146,000
	(Being deferred tax liability created)

                                                                                                                        

Part B

Answer (a)   Journal entries to record deferred tax regarding the tax loss in the year 2019:

                                                                                                                                                                (in $)

Date	Particulars	Debit	Credit
2019
March 31	Deferred tax asset A/C                                                        DR.	45,000
	To Profit and loss A/C		45,000
	(Being Deferred tax asset created on the occurrence of tax losses) ($150,000*30%)

Notes: Deferred Tax Asset is created to the extent of

1. Taxable Temporary difference existing in the entity that is expected to be reversed in future years, against which DDT will be available for set-off

2. The probability to earn taxable profits in the future, against which DTD can be settled off

Date	Particulars	Debit	Credit
2019
March 31	Profit and loss A/C                                                        DR.	$12,000
	To Deferred tax asset A/C		$12,000
	(Being Deferred tax asset created on occurrence of tax losses) ($40,000*30%)

Answer (b)  

                                                          Journal entries for the year 2020

Date	Particulars	Debit	Credit
2019
March 31	Profit and loss A/C                                                        DR.	$12,000
	To Deferred tax asset A/C		$12,000
	(Being Deferred tax asset created on the occurrence of tax losses) ($40,000*30%)

Answer (b)  

                                                          Journal entries for the year 2020

Date	Particulars	Debit	Credit
2019
March 31	Profit and loss A/C                                                        DR.	$12,000
	To Deferred tax asset A/C		$12,000
	(Being Deferred tax asset created on the occurrence of tax losses) ($40,000*30%)