Question

On 1 July 2017, Koala Ltd acquired a depreciable asset at a cost of $500 000. The asset is to be depreciated for accounting purposes over a useful life of four years using the straight-line method and a zero residual value. For tax purposes, depreciation is deductible at the rate of 40% per annum on the reducing balance. For the year ended 30 June 2018, taxable income of Koala Ltd was $250 000.

On 1 July 2018, Koala Ltd revalued the asset to a carrying amount of $420 000. For accounting purposes, depreciation will now be calculated on a three-year remaining useful life and a zero residual value. For the year ended 30 June 2019, taxable income of Koala Ltd was $320 000.

On 1 July 2019, Koala Ltd disposed of the asset for $125 000 cash.

The tax rate is 30% throughout this period.

Required

Determine the carrying amount, tax base and any related deferred tax in relation to this asset as at 30 June 2018 and 30 June 2019. Show all workings.

Show the general journal entries to record current and deferred income tax for the reporting periods ended 30 June 2018 and 30 June 2019.

Show the general journal entries (including any deferred tax consequences) to revalue the asset on 1 July 2018 and dispose of it on 1 July 2019.

Answer 1

Answer to Q1

Calculation of carring amount of assets , current tax and deffered tax

Carrying amounts

Calcualtion of tax base

A

Asset value as on 1st july 2017

500000

Asset value as on 1st July 2017

500000

Depreciation for year ending june 2018

125000

(A/4)

Depreciation for year ending june 2018 as per tax

200000

(500000*40/100)

B

Carrying amount as on 30th june 2018

375000

(A-D)

Tax base for year end june 2018

60000

(200000*30/100)

C

Revaluation of asset as on 1st july 2018

420000

Carrying amount as 1st july 2018

300000

(500000-200000)

D

Depreciation for year ending June 2019

140000

(C/3)

Depreciation for year ending june 2019

120000

(300000*40/100)

E

Carrying amount for year ending june 2019

280000

(C-D)

Carrying amount as on June 2019

36000

(120000*30/100)

Calcualtion of deferred Tax

year end june 2018

year end june 2019

A

Depreciation as per accounts

125000

140000

B

Depreciation as per Tax

200000

120000

C

Timing difference (A-B)

(75000)

20000

D

Defferred tax asset / (Liablity)(C*30/100)

(22500)

6000

E

Net deffered tax asset /(Liablity)

(16500)

(22500-6000)

Answer to Q2

Journal entries

Current tax calculation

year ending june 2018

year end june 2018

year end june 2019

A

Taxable income given in question

250000

320000

1

Current Tax account __________ dr

75000

B

Income tax @ 30%

75000

96000

(A*30/100)

To Cash / Bank account

75000

(Being current tax paid)

2

Profit and loss account ____________ dr

22500

To Deferred tax liablity account

22500

(Being deferred tax liablity created for year ended june 2018)

year ending june 2019

Current Tax account __________ dr

96000

To Cash / Bank account

96000

(Being current tax paid)

Deferred tax liablity ____________ dr

6000

To Profit and Loss account

6000

(Being deferred tax liablity created for year ended june 2019)

Answer to Q3

Journal entries for revaluation of assets

value as on 30th June 2018

375000

Asset revalued at

420000

Asset upward valued by

45000

(420000-375000)

1

Asset account _____________ Dr

45000

To Revaluation reserve account

45000

( being asset revalued by 45000)

Carrying amount as on june 2019

280000

(calculated in Q1)

Asset dispose off as on 1st july 2019

125000

Loss on sale of assets

155000

2

Cash / Bank account_____________Dr

125000

Profit and loss account __________Dr

155000

To Assets account

280000

(Being asset sold and loss on sale of asset is booked)