A. You are provided with the following information form the accounts of BBS Ltd for the year ending 30 June 2019 Cash Sales 950 000 Cost of Goods Sold 35 000 Amount received in advance for services to be performed in August 2019 9 500 Rent expenses for year ended 30 June 2019 9 000 Rent Prepaid for two months to 31 August 2019 1 200 Doubtful debts expenses 1 200 Amount provided in 2019 for employees’ long-service leave entitlements 5 000 Goodwill impairment expenses 7 000 Required: Calculate the taxable profit and accounting profit for the year ending 30 June 2019. B. GYV Ltd has the following deferred tax balances as at 30 June 2019. Deferred tax asset $9 00 000 Deferred tax liability $7 00 000 The above balances were calculated when the tax rate, was 20 percent. On 1 December 2019, the government raises the corporate tax rate to 25 percent. Required: Provide the journal entries to adjust the carry-forward balances of the deferred tax asset and deferred tax liability
ANSWER:
(1).
Calculate taxable profit and accounting profit for the year ending 30 June 2019
Calculate the accounting profit: | |
Particulars | Amount ($) |
Cash sales | $950,000 |
Less: Cost of Goods sold | $35,000 |
Gross profit | $915,000 |
Less: Expenses | |
Rent expense | $9,000 |
Doubtful debts | $1,200 |
Amount paid for Employees LSL (50% upto June, 2019) | $2,500 |
Goodwill impairment expense | $7,000 |
Total accounts profit | $895,300 |
..
Taxable profit
Particulars |
Amount ($) |
Total accounts profit |
$895,300 |
Less: Amount paid for Employees LSL (50%) |
2500 |
Add : amount received in advance |
9500 |
Less: Prepaid rent |
1200 |
Add: doubtful debt exp |
1200 |
Total Taxable profit |
$902300 |
(2).
Changes In Future Tax Rates
20% rate to 25%
Here the Tax rate increase:
DTA will increase
Current deferred tax assets based on 20% =900000
If rate change to 25% = DTA = 900000 / 20% * 25% = 1125000
The DTA increased by $225000 ( 1125000 - 900000 )
Journal entry
Accounts |
Debit |
Credit |
Deferred Tax Asset |
$225000 |
|
Income Tax Expense |
$225000 |
|
(To record adjustment in tax rate) |
.
DTL will decrease
Current deferred tax Liability based on 20% =700000
If rate change to 25% = DTA = 700000 / 20% * 25% = 875000
The DTL increased by $175000 ( 875000 - 700000 )
Journal entry
Accounts |
Debit |
Credit |
Income Tax Expense |
$175000 |
|
Deferred Tax Liability |
$175000 |
|
(To record adjustment in tax rate) |
=================
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