Question

Phipps Car Rentals Ltd commenced operations on 1 July 2016. At this time it purchased 4 cars at a cost of $30,000 each, and proceeded to rent these on a short-term basis to people visiting Canberra. Accounting operating profit before tax was as follows:

2016/7	$250,000
2017/8	$350,000
2018/9	$450,000

For taxation purposes the cars are depreciable at 15% p.a. whilst for accounting purposes they a depreciable at 10% p.a., both straight line. The tax rate for the years 2016/7 is 30%. After the commencement of the year 2017/8 it is announced that the tax rate decreases to 27.5% and this applies for the 2017/8 year onwards

2016/7 - When establishing Phipps in 2016/7, costs of $5,000 were incurred which are non-deductable for tax purposes. To minimise his tax payments in this financial year, Phipps prepays interest of $9,000 relating to the next month.

2017/8

Phipps is fined $10,000 for the non-payment of superannuation on account of employees (this is not tax deductible).

2018/9

Phipps recognises the provision for long service leave of $5,000 as an expense. Additionally, Phipps believes that the cars are still worth $25,000 each and revalues the cars to this value at the end of the financial year. Phipps has a policy of not selling cars. Rather as they get older, the cars are rented to less discerning markets and ultimately to backpackers.

Required

Prepare journal entries to record the tax expense and related changes in the deferred tax balances for years 2016/7-2018/9 in accordance with AASB112 Income Taxes.

Working

Answer 1

Phipps Car Rentals Ltd
Calculation of current tax and deferred tax
Year	2016/7	2017/8	2018/9
	(Amount in $)	(Amount in $)	(Amount in $)
Operating profit before tax	250000	350000	450000
Add: Depreciation@10%- straight line	12000	12000	12000
Cars cost 30000 each and 4 cars bought
Add: Non deductable costs for tax payments	5000	0	0
Add: Prepaid interest	9000
Add: Non payment of superannuation			10000
Less: Interest eligible for deduction		9000
Less: Deprecaiton allowable U/s 15%	18000	18000	18000
	258000	335000	454000
Tax rate	30%	27.50%	27.50%
Current tax	77400	92125	124850
Calculation of Income for deferred tax purpose
Operating profit before tax	250000	350000	450000
Add: Non deductable costs for tax payments	5000	0	0
Add: Non payment of superannuation			10000
	255000	350000	460000
Tax on the above	76500	96250	126500
Deferred tax liability	-900	4125	1650
Journal entries for current tax expense
2016/7	Debit($)	Credit($)
Current tax(in P &L)	77400
Provision for tax (Liability		77400
2017/8	Debit($)	Credit($)
Current tax(in P &L)	92125
Provision for tax (Liability		92125
2018/9	Debit($)	Credit($)
Current tax(in P &L)	124850
Provision for tax (Liability		124850
The revaluation of cars is no need consider while calculating the above taxes
because the depreciation on revaluation is not considered in P & L and for tax
purposes also
Journal entries for deferred tax expense
2016/7	Debit($)	Credit($)
Provision for deferred tax (Liability)	900
Deferred tax(in P &L)		900
2017/8	Debit($)	Credit($)
Deferred tax(in P &L)	4125
Provision for deferred tax (Liability)		4125
2018/9	Debit($)	Credit($)
Deferred tax(in P &L)	1650
Provision for deferred tax (Liability)		1650