Question

Calculation of current and deferred tax, and adjustment entry

The profit before tax, as reported in the statement of profit and loss for Adeline Ltd for the year ended 30 June 2021, amounted to $100 000, including the following revenue and expense items.

Sales revenue	650000
Interest revenue	50000
Government grant (non-taxable)	50000
Cost of goods sold	400000
Bad Debts expense	10000
Depreciation expense – equipment	10000
Depreciation expense – plant	20000
Research and development expense	80000
Wages Expense	120000
Long service leave expense	20000

The statement of profit and loss for Adeline Ltd for the year ended 30 June 2021 also included a gain on sale of equipment of $10 000. According to AASB 116/IAS 16, this gain is not classified as revenue, but it is nevertheless part of the accounting profit before tax for the year. The draft statements of financial position of Adeline Ltd at 30 June 2020 and 30 June 2021 showed the following assets and liabilities.

Assets	2020	2021
Cash	30,000	30,000
Inventories	100,000	150,000
Accounts receivable	50,000	70,000
Allowance for doubtful debts	(5,000)	(10,000)
Interest receivables	25,000	20,000
Equipment	30,000	-
Accumulated depreciation - Equipment	(15,000)	-
Plant	20,000	20,000
Accumulated depreciation - Plant	(40,000)	(60,000)
Goodwill	15,000	15,000
Differed Tax Asset	33,000	?
Liabilities
Accounts payable	60,000	40,000
Wages Payable	50,000	80,000
Revenue received in advanced	-	20,000
Loan Payable	200,000	100,000
Provision for long service leave	40,000	30,000
Deferred tax liability	24,000	?

Additional information

In the year ended 30 June 2020, Adeline Ltd had a tax loss of $65 000 that it carried over in the deferred tax asset. In June 2021, the company received an amended assessment for the year ended 30 June 2020 from the ATO, indicating that an amount of $5000 claimed as a deduction has been disallowed. Adeline Ltd has not yet adjusted its accounts to reflect the amendment.

Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. All other general taxation rules apply.

The movement in the equipment account is caused by the sale of the equipment on 1 March 2021 for which a gain on sale of $10 000 was recognised as part of the profit before tax (see above). Adeline Ltd had purchased the equipment on 1 July 2019 (with an estimated useful life of 2 years and no residual value) and for taxation purposes it claimed its full cost as a deduction at 30 June 2020.

The plant is depreciated on a straight?line basis over 10 years for accounting purposes, but over 5 years for taxation purposes. The plant is not expected to have any residual value.

All research and development expenses were paid in cash during the year ended 30 June 2021.

The company tax rate is assumed to be 30% for the year ended 30 June 2020 and 28% for the year ended 30 June 2021. The balances of the deferred tax accounts at 30 June 2020 are still reflecting the 30% tax rate.

Required

1. Prepare the current tax worksheet and the journal entry to recognise current tax at 30 June 2021.

2. Prepare the deferred tax worksheet and journal entries to adjust deferred tax accounts.

Answer 1

Part 1

Calculation of Current Tax as at 20 June 2021

Worksheet

Particulars	Notes	Amount $
Net Profit		100,000
Add Disallowed Expenditure	1	5,000
Less Non Taxable Income	2	(50,000)
Less Profit on sale of Fixed Asset	3	(10,000)
Adjusted Net Profit		45,000

Tax on Net Profit ( Profit Before Tax) = $45,000*30%

                                              = $13,500

Journal Entry

Income Tax Expense A/c                  Dr         $13,500

              to Income Tax Payable                                   $13,500

Notes

1. An expense disallowed should be added to the revenues

2. Non Taxable income do not form part of taxable income

3. profit on sale of Fixed Assets are not recognised as income as it does not meet the criteria of IAS 16

4. It is assumed that advance revenue received in 2020 has been realised this year

5. It is assumed that R & D expenses meet the criteria as per ASC 730 to recognise it as expense

Part 2

Deferred Tax is calculated only when the company uses different accounting systems for Financials and Tax purposes.

For deferred tax all non-cash expenditures must be eleminated for the purpose of calculating Profit Before Tax.

Net Profit = $100,000

                    add non cash exp

                                   Depreciation                      = $ 30,000

                    less Non taxable Income                   = ( $ 50,000)

PBT                                                                     = $ 80,000

Tax rate                                                                = 30%

Defered Tax                                                          = $24,000

Journal Entry

Profit & Loss A/c                           Dr     $24,000

                to Deferred Tax Liablility                        $24,000