Question

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 $50,000
2021 $40,000
2022 and beyond No estimation is available

The announced income tax rates for 2018 and thereafter was 20%.

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

(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.

(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.

Answer 1

Taxable Temporary Differences	01-04-2018 to 31-03-2019
Sl	Particulars	Beginning of the Year	Current Year	End of the Year
1	Furniture
	Depreciation	$       (3,20,000)	$ (1,60,000)	$      (4,80,000)
	Applicable Tax Rate	20%		20%
	Gross Deffered Tax Liability	$          (64,000)		$         (96,000)
	Change in Deffered Tax Liability		$     (32,000)
2	Computer Equipment
	Depreciation	$                     -	$ (2,00,000)	$      (2,00,000)
	Applicable Tax Rate	20%		20%
	Gross Deffered Tax Liability	$                     -		$         (40,000)
	Change in Deffered Tax Liability		$     (40,000)
Deductible Temporary Difference	01-04-2018 to 31-03-2019
1	Interest Receivable
	Accrued Interest	$                     -	$       10,000	$           10,000
	Applicable Tax Rate	20%		20%
	Gross Deffered Tax Assets	$                     -		$             2,000
	Change in Deffered Tax Assets		$         2,000
Journal Entries
Dr	Deffered Tax Expense	$            72,000
Cr	Deffered Tax Liability	$            72,000
Dr	Deffered Tax Asset	$              2,000
Cr	Deffered Tax Expense	$              2,000