Question

Jaguar Ltd purchased a machine on 1 July 2016 at the 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:

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

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

(c) Prepare the necessary journal entries on 30 June 2017.

Answer 1

a.

Depreciation as per books = $640,000/ 5 = $128,000

Depreciation for tax purpose = $640,000/4 = $160,000

Excess of tax depreciation over book depreciation = $160,000 - $128,000 = $32,000

Taxable profit = Profit before tax - Excess of book depreciation over tax depreciation

= $600,000 - $32,000

Taxable profit = $ 568,000

Tax payable = $ 568,000 * 30%(Tax rate) = $ 170,400

Therefore, The Tax payable is $ 170,400

b. In the given case, Company will be having deferred tax liability as life of Machine is 5 years as per books and for taxation purpose its 4 years

Deferred tax liability calculation

Particulars	For tax purpose	As per books	Difference
Profit	$ 600,000	$ 568,000	$ 32,000
Tax rate	30%	30%	30%
Tax	$ 180,000	$170,400	$ 9,600

As per above workings tax as per books is $ 180,000 , whereas for taxation purpose it pays $ 170,400. This difference creates a deferred tax liability of $9,600 which can be accounted in upcoming years

c.

Date	Particulars	Debit	Credit
30/06/2017	Income tax expense	$170,400
	Deferred tax liability		9,600
	Income tax payable		160,800
	(Being income tax expense and deferred tax assets recorded)

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