Question

1 The following information is extracted from the financial statements of Tasty Road Bhd. at 31 December 2018.

Tasty Road Bhd.

Statement of Financial Position as at 31 December 2018

RM’000 Assets 2700 Cash 2700 Trade Receivable(Net) 400 Interest Receivable 1100 Inventory 2000 Plant 2000 Research & Development 8000 Total 16,800 Equity & Liabilities Trade Payable 2,900 Loan 4,650 Provision for Warranties 150 Deferred tax liability 290 Share Capital 7,000 Retained Earnings 1.750 Total 16,800

RM’000

Additional information for relevant assets and liabilities:

1. Income tax rate for the year ended 31 December 2018 is 30%. It has been reduced from the previous year’s tax rate of 35%.

2. The company provides for doubtful debts, but tax rules allow only specific bad debts. The carrying amount of trade receivables of RM2.7 million after providing for provision for doubtful debts amounting RM 300,000.

3. Interest receivable refers to interest on investment. The company accrues interest on investment on a time basis, but interest investment is taxable only upon receipt.

4. Capital allowance given to plants for tax purposes is RM3.6 million. The carrying amount of the plant of RM2 million is after providing for accumulated depreciation amounting to RM3 million.

5. Research and development refers to the development costs that were capitalized. The tax law allows all research and development costs to be written off immediately in computing taxable profits.

6. Under tax rules, warranties are deductible expenses only when goods are returned or reimbursed. However, the company provides for warranties on goods sold only.

7. The balance in the deferred tax liability account is the carried forward closing balance from prior year.

Required:

Compute the amount of deferred tax that should appear in the account of Tasty Road Bhd. for the year ended 31 December 2018. Prepare a table showing the carrying amount, tax base and temporary differences for each of the items above.

Answer 1

Answer : For Assets : Tax Base = Future tax deduction/exemptions on such asset

For Liabilities : Tax Base = Carrying Amount - Further deduction onsettlement of Liabilities

Calculation of Tax Base & Temporary Difference

RM' 000   

Particulars	Asset/ Liability	Carrying Amount	Tax Base	Temp. Difference	Deferred Tax : Asset/ (Liability)
Provision for Doubtful Debts	Liability	300	0	300	90
Interest Receivable	Asset	1100	0	1100	(330)
Plant	Asset	2000	600	1400	(420)
Reseach & Development	Asset	8000	0	8000	(2400)
Warranties	Liability	150	0	150	45
TOTAL	(3015)

Deferred Tax Liability to be shown in balance sheet is RM 3.015 million.

Deferred tax to be charged to Profit & Loss Statement would be (3015-290) RM 2.725 Million.

Note : 1) The effect of change in tax rate would have no impact in changing previous year's liability.

2) It has been assumed that Deferred tax balance of previous year has arisen out of the same balance sheet items as given above.