Question

The following data are taken from the trial balance of Bula Island Limited on 30 June 2018 with selected comparative information provided for 30 June 2017.

2018 2017 Sales revenue 9,245,000 Interest revenue 850,000 Royalties revenue 1,450,000 Dividend revenue 150,000 Depreciation-building 147,500 Depreciation-plant 262,500 Depreciation-equipment 75,000 Research and development expenditure 1,650,000 Cost of goods sold 4,005,000 Warranty expense 195,000 Wages and salaries expense 3,475,000 Long service leave expense 235,000 Interest expense 305,000 Rates and taxes on property 145,500 Doubtful debts expense 142,500 Accounts receivable 675,000 375,000 Estimated uncollectible debts 182,000 95,000 Interest receivable 300,000 275,000 Royalties receivable 920,000 745,000 Land (at cost) 2,500,000 2,500,000 Buildings 3,200,000 3,200,000 Accumulated depreciation-buildings 442,500 295,000
Plant 2,100,000 2,100,000 Accumulated depreciation-Plant 787,500 525,000 Equipment 750,000 750,000 Accumulated depreciation-equipment 225,000 150,000 Wages and salaries payable 345,000 265,000 Provision for long service leave 355,000 245,000 Provision for warranty claims 130,000 115,000 Interest payable 100,000 100,000

Additional Information

1. All depreciable assets were acquired on 1 July 2015. For financial reporting purposes, depreciation is recognised on a straight line basis, over 20 years for buildings (estimated residual value $250,000), eight years for plant and 10 years for equipment. For tax purposes, straight line depreciation is applied over 40, 10 and eight years respectively. 2. After reviewing all relevant information, the directors determined that, at 30 June 2018, the plant was impaired by $250,000 (this is not reflected in the amounts presented in the trial balance). 3. On 30 June 2018, after careful consideration, the directors of Bula Island Ltd decided to adopt the fair value model for land; the fair value of land on 1 July 2017 was $3,500,000 and on 30 June 2018 was $3,250,000. 4. The research and development expenditure qualifies for the additional 25% taxation deduction. 5. The tax rate at 30 June 2017 was 30%. On 15 June 2018, legislation was enacted decreasing the tax rate to 25% effective 1 July 2018.


Required:

1. Calculate the amount of current tax expense. Use an appropriately labelled table for this task. 2. Prepare a deferred tax worksheet to calculate the amounts for deferred tax assets and deferred tax liabilities for the reporting period 30 June 2018. Use an appropriately labelled table for this task. 3. Prepare journal entries for the income tax expense related items for the reporting period 30 June 2018.

Answer 1

Ans 1. Computation of Current Tax Expenses:

Particulars	Amount	Amount
Total Revenue		11,695,000
Total Expenses		10,638,000
Earning before Tax (EBT)		1,057,000
Current Tax (EBT x 30%)		317,100

Ans 2. Computation of Deferred Tax:

Calculation of Deferred Tax for the period 30 June 2018

Particulars	Accounting	Taxation	Difference	Deferred Tax	Asset/ Liab
Depreciation on Building	147500	73750	73750	18438	Asset
Depreciation on Plant	262500	210000	52500	13125	Asset
Depreciation on Equipment	75000	93750	-18750	4688	Liability
Impairment of Plant	250000	0	250000	62500	Asset
Research & Development	1650000	2062500	-412500	103125	Liability
Net Deferred Tax				13750	Liability

Total Deferred Tax Asset - $ 94,063 Total Deferred Tax Liability - $ 107,813

Ans 3. Journal Entries:

Date	Particulars	LF	Amount	Amount
30.06.2018	Current Tax A/c ... Dr. To Statement of Profit & Loss A/c		317,100	317,100
30.06.2018	Statement of Profit & Loss A/c ... Dr. To Deferred Tax (Liab) A/c		13,750	13,750