Question

Swiftsure Ltd has carried forward a deferred tax liability of 170000, arising from differences between carrying amount and tax bases of the company’s assets. On 30 June 2013, the carrying amounts and tax bases of the company’s assets were as follows:

Assets Tax base A B Carrying amount $142000 $541000 $820000 $86000 $108000 $340000 $610000 $40000 с D The current income tax expense for the year ended 30 June 2013 is $8400000 and tax rate is 30%. Required: (a) Prepare general journal entries on 30 June 2013 to record company's income tax expense. (b) How would your answer differ if the balance of the deferred tax liability carried forward was $120000?

Answer 1

As per IAS 12, income taxes "The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes" i.e. 'a' below

"Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base." i.e. (a-b) below

"Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences." i.e. 'd' below

Since, the carrying amount of asset is higher than the tax base of the asset it means that the temporary difference between the carrying amount of asset and the tax base of the asset would be taxed in future hence would give rise to deferred tax liability.

Calculation of deferred tax liability on 30 June 2013:

Assets	Carrying amount (a)	Tax Base (b)	Temporary difference c=a-b	Deferred tax liability d=c*30%
A	$142,000	$108,000	$34,000	$10,200
B	$541,000	$340,000	$201,000	$60,300
C	$820,000	$610,000	$210,000	$63,000
D	$86,000	$40,000	$46,000	$13,800
	$1,589,000	$1,098,000	$491,000	$147,300

(a) General journal entries on 30 June 2013 when carried forward deferred tax liability is $170,000:

Date	Particulars	Debit	Credit
30 June 2013	Tax expense	$8,400,000
	To Provision for income tax expense		$8,400,000
	(Being current income tax expense recognised for the year)
30 June 2013	Deferred tax liability	$22,700		refer note 1
	To Tax expense		$22,700
	(Being excess deferred liability reversed for the year)

Note 1

Deferred tax liability at the end of 30 June 2013	$147,300
Less: Deferred tax liability carried forward on 30 June 2013	($170,000)
Deferred tax expense/(credit) during the year	($22,700)

(b) General journal entries on 30 June 2013 when carried forward deferred tax liability is $120,000:

Date	Particulars	Debit	Credit
30 June 2013	Tax expense	$8,400,000
	To Provision for income tax expense		$8,400,000
	(Being current income tax expense recognised for the year)
30 June 2013	Tax expense	$27,300		refer note 2
	To Deferred tax liability		$27,300
	(Being excess deferred liability reversed for the year)

Note 2

Deferred tax liability on 30 June 2013	$147,300
Less: Deferred tax liability carried forward on 30 June 2013	($120,000)
Deferred tax expense/(credit) during the year	$27,300