Question

B. Prepare the deferred tax worksheet as at 30 June 2019 and the tax journal entries. 15 marks
QUESTION 2 30 marks DaJen Ltd prepared a draft statement of profit and loss (P/L) for the year ended 30 June 2019 which showed a profit before tax of $24 420. The P/L included the following items of income and expense: Government grant (exempt from tax) Proceeds on sale of plant 5 000 23 000 Bad debts expense Depreciation expense - plant Insurance expense Long-service leave expense Impairment of goodwill Carrying amount of plant sold 8 100 14 000 12 900 14 500 11 100 20 000

Answer 1

Gain on sale of Asset as per books :

Proceed on sale of plant	23,000
Less : Carrying amount of plant sold	20,000
Gain on sale of Plant as per books	3,000

Gain on sale of Asset as per tax :

Proceed on sale of plant	23,000
Carrying amount of plant sold (as per tax)	15,000
Gain on sale of Plant as per tax	8,000

We have not been asked to prepare FY 2018 Deferred tax statement but it will be helpful to understand that expense relating to insurance, doubtful debt and long service leave is allowed for tax purpose on payment basis :

Deferred Tax Asset 2018
Deffered tax liability for depreciation (-7000*30%)	-2100
Deffered tax liability for prepaid Insurance (-5600*30%)	-1680
Total Deferred Tax Liabilities	-3780
Deffered tax asset for carry forward loss (16900*30%)	5,070
Deferred tax asset for doubtful debts closing provision (5200*30%)	1,560
Deferred tax asset for long-service leaves closing provision (9700*30%)	2,910
Total Deferred Tax Assets	9,540

In view of finding that insurance, doubtful debt & long service leave allowed on payment basis hence we also need to find such paid amount as under based on detail available :

Calculation of Paid Amount which is allowed as deduction on payment basis :
Particulars	Prepaid Insurance	Doubtful debt	Long service leaves
Opening balance	5,600	5,200	9,700
Add: P&L Expenses during the year	12,900	8,100	14,500
Total	18,500	13,300	24,200
Less : Closing balance	3,400	6,800	13,200
Amount considered for tax deduction in 2019	15,100	6,500	11,000

Now let us answer the questions :

Q.1 Prepare Current tax worksheet year ended 30th Jun 2019 & tax Journal Entries :

Current Tax computation for the period ended 30th Jun 2019
Profit before tax	24,420
Less : Government grant exempt from tax	(5,000)
Add : Book depreciation	14,000
Less : Tax depreciation	(20,250)
Add : Imapairment of goodwill	11,100
Less : Book gain on sale of Plant	(3,000)
Add : Gain on sale of plant as per tax	8,000
Add : P&L expense for Insurance	12,900
Add : P&L expense for doubtful debt	8,100
Add : P&L expense for long service leave	14,500
Less : Amount paid for doubtful debt allowed in tax	(6,500)
Less : Amount paid for long service leave allowed for tax	(11,000)
Less : Amount paid for Insurance allowed for tax	(15,100)
Taxable Income	32,170
Tax @ 30%	9,651

As observed earlier the insurance, doubtful debt and long service leave expense is allowed on payment basis only hence we have to add back expense debited to P&L and reduce amount allowed on payment basis as calculated earlier.

Further while working out FY18 deferred tax asset & liability there is no asset or liability recognised for goodwill which indicate that no tax amortization of good will is carried out. Impairment of goodwill is not allowed as a tax deduction hence it is added back.

Government grant is not taxable hence it is reduced from profit before tax.

Further current tax can be set-off against carry forward losses, however brought forward losses of 5,000 is not utilisable due to exempt income, following are relevant entries :

Journal Entry for Current Tax
Current Tax A/c Debit	9,651
Current tax liability account credit	9,651
(Being current tax liability on taxable income of 32,170 @ 30% accounted

Journal entry for deferred tax not utilised against exempt income
Deferred Tax Account Debit (5000*30%)	1500
Deferred Tax Asset A/c credit	1500
(Being deferred tax not utilised for exempt income)

Journal Entry for set-off of carry forward losses
Current tax liability A/c Debit (16900-5000)*30%	3570
Deferred Tax Asset A/c credit	3570
(Being set-off of brought forward losses against current tax liability)

Q.2 : Prepare Deferred tax worksheet year ended 30th Jun 2019 & deferred tax Journal Entries :

Deferred tax statement on 30th Jun 2019
Deferred tax liability for depreciation ((32000-40250)*30%)	(2,475)
Deferred tax liability for prepaid Insurance (-3400*30%)	(1,020)
Total Deferred Tax Liabilities	(3,495)
Deferred tax asset for carry forward loss (0*30%)	-
Deferred tax asset for doubtful debts closing provision (6800*30%)	2,040
Deferred tax asset for long-service leaves closing provision (13200*30%)	3,960
Total Deferred Tax Assets	6,000

Journal Entry for differential deferred tax liability
Deferred Tax A/c Dr	285
To defferd Tax liability	285
(Being increase in deferred tax liability during 2019)

Journal Entry for timing difference deferred tax Assets
Deferred Tax A/c Dr	1530
Deferred Tax Asset A/c Cr	1530
(Being reduction in deferred tax asset during 2019)

Q.3 Discuss the factors which company should have considered before recognising deferred tax asset for carry forward losses

Response : As per US local GAAP while recognising deferred tax asset for carry forward losses which can be utilised, company should have considered evidence that carry forward losses can be off-set against taxable income. Usually company should demonstrate through forecasting that they have taxable income in future against which carry forward losses can be set-off.

Apart from this following is calculation of current tax liability as on 30th jun 2019 :

Current Tax Liability
Current tax 2019	9,651
Less : Set-off of losses	(3,570)
Current tax liability	6,081

The Balance sheet Account detail on 2019 is as under :

Current Tax Liability : 6,081

Deferred Tax Liability : 3,495

Deferred Tax Asset : 6,000