Question

Jaguar Ltd purchased a machine on 1 July 2016 at a cost of $640,000. The machine is expected to have a useful life of 5 years (straight line basis) and no residual value. For taxation purposes, the ATO allows the company to depreciate the asset over 4 years.

The profit before tax for the company for the year ending 30 June 2017 is $600,000. To calculate this profit the company has deducted $60,000 entertainment expense, and $80,000 salary expense that has not yet been paid. Also the company has included $70,000 interest as income that the company has not yet received. The tax rate is 30%.

Required:

(i)Calculate the company’s taxable profit and hence its tax payable for 2017.

(ii)Determine the deferred tax liability and/or deferred tax asset that will result.

(iii)Prepare the necessary journal entries at 30 June 2017.

Answer 1

(i)Calculation of Taxable Profit and Tax payble for For 2017 As Under

First of all we have calculated taxable proft above profit i.e $600000 is book profit not taxable profit.

All other expances other then depriciation is allowable expanses for taxable profit. For depriciation we have to taken assest life 4 year and not 5 years so due to that our taxable profit has been decrease as under.

Actual life of machine is 5 Years so depriciation per year is $128000(i.e $640000/5)

Life of machine as allowed by ATO is 4 Year so Depriciation per year is $160000(i.e $640000/4)

Profit as per books is $600000 after book deprication so we have to add depriciation $128000

So Profit Before Depriciation and tax is $728000(i.e$600000+$128000)

Now we have deduted Depriciation as allowe by ATO i.e $160000 from PBDT-$728000

So Taxable Profit is $568000($728000-$160000)

Tax on it is $170400($568000*30%)

(ii) Deffered Tax Liability or Differed tax Assets Calculation

As due to Depriciation we have to created DTL or DTA

As in future we have to take less depriciation for taxable profit and more depricaiton for books profit.so in future we have to pay more take so we have ot created Deffered tax liability because in future we have more liability compared to today due to depriciation componant.

Deffered tax liability-Depriciation as per books for year ending 2017-$128000(as calculated in point No (i))

-Depriciation for tax purpose for year ending 2017-$160000(as calculated in point No (i))

Differnace between them is $32000(i.e $160000-$128000)

So DTL is as Under

($32000*30%)

DTL is $9600

(iii) Journal Entry For the Year Ended 2017

1) For Deffered Tax Liability

Profit And Loss A/c Dr. $9600 (as calculated in point No (ii))

To Deffered Tax Liability Cr. $9600 (as calculated in point No (ii))

2) Provision For Income Tax

Income tax expances Dr.$30000 (as calculated in point No (i))

To Provision for income tax Cr $30000. (as calculated in point No (i))

3) Depriciation entry for the year

Depriciaiton A/c Dr.$128000(as calculated in point No (i))

To Machine A/c Cr. $128000 (as calculated in point No (i))