Question

The following information was extracted from the records of Bulb Ltd as at 30 June 2013:

The depreciation rates for accounting and taxation are 15% and 25% respectively. Deposits are taxable when received, and warranty costs are deductible when paid. An allowance for doubtful debts of $25 000 has been raised against accounts receivable for accounting purposes, but such debts are deductible only when written off as uncollectable.

Required

1. Calculate the temporary differences for Bulb Ltd as at 30 June 2013. Justify your classification of each difference as either a deductible temporary difference or a taxable temporary difference.

2. Prepare the journal entry to record deferred tax for the year ended 30 June 2013 assuming no deferred items had been raised in prior years.

Exercise 6.16 CALCULATION OF DEFERRED TAX, AND ADIUSTMENT ENTRY The following information was extracted from the records of Bulb Ltd as at 30 June 2013 Tax base Asset (liability) Accounts receivable Motor vehicles Provision for warranty Deposits received in advance Carrying amount $150000 165000 (12000) (15000 $175000 125000 0 0. The depreciation rates for accounting and taxation are 15% and 25% respectively Deposits are taxable when received, and warranty costs are deductible when paid. An allowance for doubtful debts of $25000 has been raised against accounts receivable for accounting purposes, but such debts are deductible only when written off as uncollectable Required 1. Calculate the temporary differences for Bulb Ltd as at 30 June 2013, Justify your classification of each difference as either a deductible temporary difference or a taxable temporary difference. 2. Prepare the journal entry to record deferred tax for the year ended 30 June 2013 assuming no deferred items had been raised in prior years

Answer 1

In case of Accounts Receivable, provision for warranty and deposits received in advance expenses have been disallowed in the present as per tax laws as the same provides that they will be allowed as expense in the future, when bad debts actually occur, payment for warranties have actually been made and deposits are taxable are actually received. In all the three cases, there arises a future benefit due to which lesser taxes will have to be paid in future. Thus, they have been classified as Deferred Tax Asset.