Question

Spring Ltd's Financial records at 30 June 20X6

Assets

Accounts Receivable 760 000

Allowance for doubtful debts (6000)

Interest receivable 34 000

Prepaid Insurance 15 000

Plant (at cost) 800 000

Accumulated Depreciation for plant (420 000)

Liabilities

Provision for long service leave 350 000

Additional information:

The amount of accumulated deprecation of plant for tax purposes is $640 000

The tax rate is 30% per annum

Required: Calculate Total Taxable Temporary difference for Spring Ltd measured at 30 June 20X6.

Answer 1

Taxable temporary differences are timing differences which cause taxable income in current period to be lower than pretax accounting income subject to taxes and hence income tax payable in current period to be lower than the accrual income tax expense. The difference between the income tax payable and the accrual income tax equals the deferred tax liability.

In the question given above, included in the accounting income for tax purposes is a depreciation charge of $4,20,000 on straight-line basis while tax rules allow depreciation of $6,40,000. It means that the taxable income is lower than accounting income for tax purposes by $ 2,40,000 (=$ 6,40,000 - $4,20,000). It is a taxable temporary difference because in future periods tax depreciation will be lower resulting in higher income tax payable. Hence, that increased future tax must be recognized today.

In the question given above, included in the accounting income for tax purposes is a provision for doubtful debts of $6,000 while tax rules does not allow deduction for the same. It means that the taxable income is higher than accounting income for tax purposes by $ 6,000 It is a taxable temporary difference.

Interest receivable and Prepaid Insurance will not have any impact because they won't be considered for taxable income calculation as per books and for tax purpose.

In case of provision for long service leave, any contributions made to the fund is a non-deductable expense and hence won't be allowed as per tax rules. But, as the current year contribution to the fund is not given, I am not considering the same.

Hence,  Total Taxable Temporary difference for Spring Ltd measured at 30 June 20X6 = $ 2,40,000 - $ 6,000
= $ 2,34,000.