Question

The draft statement of profit or loss of Event Light Ltd for the year ended 30 June 2020 showed a profit before tax of $25 240, included the following items of income and expense:

Government grant (exempt from tax) Proceeds on sale of plant Carrying amount of plant sold Impairment of goodwill Bad debts expense Depreciation expense – plant Insurance expense Long-service leave expense

6 000 23 000 20 000 11 100 8 100 14 000 12 900 14 500

The statements of financial position of Event Light Ltd at 30 June 2020 and 30 June 2019 include the following assets and liabilities:

EVENT LIGHT LTD Statement of Financial Position (Extract) as at 30 June
	2020			2019
Assets Cash Accounts receivable Allowance for doubtful debts Prepaid insurance Plant Accumulated depreciation – plant Goodwill Accumulated impairment losses Deferred tax asset Liabilities Accounts payable Provision for long-service leave Current tax liability Deferred tax liability	$	6 000 96 000 (6 800) 3 400 140 000 (32 000) 22 200 (11 100) ? 78 000 13 200 ? ?		$	18 000 88 000 (5 200) 4 600 170 000 (28 000) 22 200 — 8 540 76 000 9 700 — 3780

Additional information

(a)For tax purposes the carrying amount of plant sold was $15 000.

(b)The tax deduction for plant depreciation was $20 000. The accumulated depreciation on plant for tax purposes at 30 June 2020 is $40 250 (2019: $35 250).

(c)In the year ended 30 June 2019, the company recorded a tax loss. At 1 July 2019 carry forward tax losses amounted to $18 900. The company recognised a deferred tax asset in respect of these tax losses at 30 June 2019.

(d)Tax losses carried forward must be offset against any exempt income before being used to reduce taxable income.

(e)The company does not set off deferred tax liabilities and assets and the corporate tax rate is 30%.

Required

A.Prepare the current tax worksheet for the year ended 30 June 2020 and the tax journal entries.    11 marks

B.Prepare the deferred tax worksheet as at 30 June 2020 and the tax journal entries.         15 marks

C.Discuss the factors the company should have considered before recognising a deferred tax asset with respect to the tax loss incurred in the year ended 30 June 2019?                                                                                                                  4 marks

Answer 1

Answer A. (i) - Current Tax Worksheet Particulars Amount (in S.) 25,240 5,000 5,000 Profit for the Year Add: Difference of any amount forthe purpose totax calculations ($20,000 – $15,000) Add: Difference of Accumulated Depreciations for the purpose to tax calculations ($40,250-$35,250) Less: Difference of Depreciation for the purpose totax calculations ($20,000-$14,000) Adjusted profit for the year Current tax on profit(30% on $29,240) In come after tax 6,000 29,240 8,772 20,468 Answer A. (ii) - Tax Journal Entries Debit (in S.) 4,000 Credit (in S.) No. Accounting Description Depreciation on Plant TO Accumulated Depreciation on Plant ($32,000-$28,000) 1 4,000 32,000 2 Accumulated Depreciation on Plant TO Plant 32,000 14,000 3 Depreciation expense on Plant TO Accumulated Depreciation on Plant 14,000 23,000 4 Cash TO Plant 23,000 18,900 5 Government Grant TO Accumulated Loss 18,900

Answer B.- Deferred Tax Worksheet Journal Entries Debit No. Accounting Description (in S.) Deferred Tax Liabilities 3,780 TO Deferred Tax Assets Credit (in S.) 1 3,780 Answer C. 1. Before recognizing deferred tax, company should consider plant carrying amount and accumulated depreciation a/c into considerations, and also timing difference of carrying amount of the plant. 2. Net income should have calculated on the basis of net of all the losses carryforward in the current year from last financial year. Deferred tax assets and liability both should not be shown in the balance sheet it should be adjusted while calculated and should be shown in the balance sheet.