Question

Lourens Ltd commenced business on 1 July 2017. Before consideration of the items below, profit in its first year of operation was $300 000. (There were no differences between the accounting and tax treatments in arriving at that figure.) The following items have yet to be taken into account:

Property, plant and equipment was acquired on 1 July 2017 at a cost of $500 000. Depreciation is 20% per annum straight-line for accounting purposes and 30% reducing-balance for tax purposes.

The company recognised warranty expenses of $25 000, but warranty payments were only $5 000.

Accounts receivable at 30 June 2018, $300 000, doubtful debts expense, $15 000, and bad debts written off during the period, $2 500.

Employee benefits (annual leave and long-service leave) expense, $25 000; employee benefits liability as at 30 June 2018, $21 000.

The tax rate is 30%.

Required

Using the statement of financial position approach to tax allocation in AASB 112:

Calculate taxable income and prepare the general journal entry to record current income tax expense; and

Identify any temporary differences, determine the amount of any resulting deferred tax asset or deferred tax liability, and prepare the general journal entry to record deferred tax expense

Answer 1

Note: Since the profits are given before the consideration of special items, it means that the expenses as per accounting rules have not be deducted already from $300,000. Hence no adjustments/add back (since they have not been deducted yet from the profit figure provided) have been done for accounting expenses in the time of computation of taxable income. We have simply deducted the allowable expenses in accordance with tax laws.

The accounting expense details provided will be useful at the time of compuatation of deferred tax calculations.

In light of above knowledge, please find the answers below:-

Computation of taxable income for Lourens Limited
		$	$
Profit before consideration of special items			300000
Admissible deductions for tax calculations
	-Depreciation tax expense ($500,000 x 30%)	-150000
	-Warranty tax expense	-5000
	-Bad debt written off	-2500
	-Employee benefits paid (25000-21000)	-4000
			-161500
	Income chargeable to income tax @30%		138500
	Income Tax @30%		41550
Journal entry for income tax expense
	Current Income Tax expense	Dr	41550
	Income Tax payable	Cr		41550

Particulars	Carrying Amount	Tax Base	Taxable Temporary difference	Deductible Temporary Diff	Deff Tax Liability	Deff Tax Asset
Assets
Fixed Assets	500000	500000
Accumulated Depreciation	-100000	-150000
	400000	350000	50000		15000
Accounts Receivable	300000	300000
Provision for bad debt	-15000	-2500
	285000	297500		12500		3750
Liabilities
Provision for Warranty (net off payment)	20000			20000		6000
i.e. 25000 - 5000
Employee Benefits Liability	21000			21000		6300
					15000	16050
Journal entry for deferred income tax expense
Deferred Income Tax Asset	Dr	16050
Deferred income tax expense	Cr		1050
Deferred Income Tax Liability	Cr		15000