Question

I Love Corporate Accounting Ltd commences operations on 1 July 2018 and presents its first statement of profit and loss and other comprehensive income and first statement of financial position on 30 June 2019. The statements are prepared before considering taxation. The following information is available:

Statement of Profit or Loss and other comprehensive income for the year ended 30 June 2019
Gross Profit			$ 730,000.00
Expenses
Administration expenses		$   80,000.00
Salaries		$ 200,000.00
Long-service Leave		$   20,000.00
Warranty expenses		$   30,000.00
Depreciation expense - plant		$   80,000.00
Insurance		$   20,000.00	$ 430,000.00
Accounting profit before tax			$ 300,000.00
Other comprehensive income			$ Nil
Assets and liabilities as disclosed in the statement of financial positions as at 30 June 2019
Assets
Cash			$   20,000.00
Inventory			$ 100,000.00
Accounts receivable			$ 100,000.00
Prepaid Insurance			$   10,000.00
Plant - cost	$ 400,000.00
Less: Accumulated depreciation	$   80,000.00		$ 320,000.00
Total assets			$ 550,000.00
Liabilities
Accounts payable			$   80,000.00
Provision for warranty expenses			$   20,000.00
Loan payable			$ 200,000.00
Provision for long service leave expenses			$   20,000.00
Total liabilities			$ 320,000.00
Net assets			$ 230,000.00

Other information

All administration and salaries expenses incurred have been paid as at year end

None of the long service leave expense has actually been paid.

Warranty expenses were accrued, and at year end, actual payments of $10 000 have been made (leaving an accrued balance of $20 000).

Insurance was initially prepaid to the amount of $30 000. At year end, the unused component of the prepaid insurance amounted to $10 000.

Amounts received from sales, including those on credit terms, are taxed at the time of sale is made.

The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes.

The tax rate is 30 per cent

TASK:

A. Compute the following for I Love Corporate Accounting Ltd as at 30 June 2019:

 Taxable Income

 Deductible Temporary Differences

 Taxable Temporary Differences

 Current Tax Liability

 Income Tax Expense

B. Prepare journal entries for I Love Corporate Accounting Ltd as at 30 June 2019 to account for tax in accordance with AASB 112

Answer 1

1	Taxable Income
	Particulars		Amount ($)	Remarks
	Gross Profit		730,000
	Less: Expenses
	Administration expenses	80,000
	Salaries	200,000
	Long-service Leave	-		As nothing has been paid yet
	Warranty expenses	10,000		To the extent actually paid
	Depreciation expense - plant	100,000		Depreciated over 4 years for tax purpose
	Insurance	20,000
	Total Expenses		410,000
	Taxable Profit		320,000

2	Deductible Temporary Differences
	Particulars	Accounting Base Amount ($)	Tax Base Amount ($)	Deductible Temporary Difference ($)
	Provision for Long Service Award	20,000	-	20,000
	Warranty expenses	30,000	10,000	20,000
	Total Deductible Temporary Differences			40,000

3	Taxable Temporary Differences
	Particulars	Accounting Base Amount ($)	Tax Base Amount ($)	Taxable Temporary Difference ($)
	Plant less Depreciation	320,000	300,000	20,000
	Total Taxable Temporary Differences			20,000

4	Current Tax Liability
	Taxable Profit	320,000
	Tax Rate	30.00%
	Current Tax Liability ($)	96,000

5	Income Tax Expense
	Accounting Profit	300,000
	Tax Rate	30.00%
	Current Tax Liability ($)	90,000

	Journal
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
1	Current Tax Expense A/c	Dr	96,000
	Deferred Tax Asset A/c	Dr	6,000
	To Current Tax Liability A/c	Cr		96,000
	To Deferred Tax Expense A/c	Cr		6,000
	(Being Tax expense recorded)

Working
Deductible Temporary Differences	40,000
Taxable Temporary Differences	20,000
Net Deductible	20,000
Deferred Tax Asset @ 30%	6,000