Question

Accounting for income tax

The accounting profit before tax for the year ended 30 June 2017 for Aldee Ltd amounted to $235,000. It included the following income and expense items:

	$
Royalties (exempt income)	15,000 CR
Interest revenue	16,000 CR
Annual leave expense	9,000 DR
Doubtful debts expense	3,800 DR
Depreciation - plant (15% per year, straight-line)	47,250 DR
Depreciation - motor vehicles (20% per year, straight-line)	20,000 DR
Insurance expense	14,000 DR
Rent expense	42,000 DR
Warranty expense	5,600 DR
Entertainment expense (not tax deductible)	4,000 DR

The draft statement of financial position at 30 June 2017 contained the following assets and liabilities:

	$	$
Assets:
Cash	46,000	22,500
Trade receivables	88,000	45,800
Less Allowance for doubtful debts	(4,000)	(2,200)
Inventory	57,100	54,300
Interest receivable	2,000	1,000
Prepaid insurance	4,000	1,000
Plant - cost	315,000	315,000
Less Accumulated depreciation	(113,250)	(66,000)
Motor vehicles - cost	100,000	100,000
Less Accumulated depreciation	(70,000)	(50,000)
Deferred tax asset	?	17,190
Liabilities:
Trade payables	66,200	43,600
Provision for annual leave	15,600	11,000
Provision for warranties	14,200	11,600
Bank loan	130,000	150,000
Deferred tax liability	?	7,200

Additional information:

• The tax depreciation rate for plant is 20% per year, and motor vehicles is 15% per year, using the straight-line method.
• Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.
• Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• Interest revenue is only taxable when amounts are actually received, and not as amounts are accrued.
• The deferred tax asset (DTA) balance at 30 June 2016 comprised:

- DTA’s relating to temporary differences: $11,190
-   DTA’s relating to carried forward tax losses: $6,000

• Taxation legislation allows tax losses to be offset against future taxable profit.
• The tax rate is 30%.

Required:

i)   Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.

ii) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and deferred tax liabilities.

Answer 1

Particulars	Amount	Workings
Profit before Tax	235,000.00
Royalties (exempt income)	(15,000.00)
Interest revenue	(1,000.00)	(-2000+1000)
Annual leave expense	4,600.00	(15600-11000)
Doubtful debts expense	1,800.00	4000-2200
Depreciation - plant (15% per year, straight-line)	(15,750.00)	(315000*20%-47250)
Depreciation - motor vehicles (20% per year, straight-line)	5,000.00	(100000*15%-20000)
Insurance expense	(3,000.00)	(4000-1000)
Warranty expense	2,600.00	(14200-11600)
Entertainment expense (not tax deductible)	4,000.00
Tax able Income	218,250.00
Less: Lat Year Loss Setoff	20,000.00
Net Taxable Income	198,250.00
Tax @ 30%	59,475.00

Workings has been given for your Understanding.

Line Items	Temproary Difference	DTA/DTL	Deferred Tax	Effect
Interest revenue	(1,000.00)	DTL	(300.00)	Increase in DTL
Annual leave expense	4,600.00	DTA	1,380.00	Increase in DTA
Doubtful debts expense	1,800.00	DTA	540.00	Increase in DTA
Depreciation - plant (15% per year, straight-line)	(15,750.00)	DTL	(4,725.00)	Increase in DTL
Depreciation - motor vehicles (20% per year, straight-line)	5,000.00	DTA	1,500.00	Increase in DTA
Insurance expense	(3,000.00)	DTL	(900.00)	Increase in DTL
Warranty expense	2,600.00	DTA	780.00	Increase in DTA
carried forward tax losses	(20,000.00)	DTA	(6,000.00)	Reversal of DTA
		Total DTA	(1,800.00)
		Total DTL	(5,925.00)
		Total	(7,725.00)

Date	Account Description	Debit	Credit
	Income Tax	59,475.00
	Income Tax Payable		59,475.00
	(Being Income Tax provision Created)
	Deferred Tax	7,725.00
	Deferred Tax Assets		1,800.00
	Deferred Tax Liability		5,925.00
	(Being Deferred Tax recorded)

DTA Balance	15,390.00
DTL balance	13,125.00

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