Question

Net income before taxation is $67,450. A number of items in the profit and loss account have to be treated differently for tax purposes.

	Accounting Records	Taxation Records
Interest income earned but not yet received	27,000	NIL
Impairment of goodwill	45,000	NIL
Transfer to long service leave provision	24,000	NIL
Depreciation of machinery	60,000	45,000
Transfer to allowance for doubtful debts	291,000	279,000

An extract from the balance sheet at balance day reveals:

Assets	Carrying Amount	Tax Base
Plant and Machinery – at cost Accumulated Depreciation Goodwill (net) Accounts receivable (net) Interest receivable	300,000 - 60,000 105,000 85,000 27,000 457,000	300,000 - 45,000 Nil 97,000 Nil 352,000
Liabilities
Provision for Long Service Leave	15,000	Nil

Additional information:

Interest income earned $27,000 will not be included into taxable income until it is received.

An item of machinery costing $300,000 is being depreciated using the straight line method at 20% for accounting purpose and at 15% for taxation purposes.

An amount of $9,000 for long service leave paid has been charged against the provision. This amount can now be claimed as a taxation deduction.

A bad debt for $3,000 has been written off against the allowance for doubtful debts. This amount can now be claimed as a taxation deduction.

Income tax rate is 30%.

Required:

(a) A statement of taxable income.

(b) All necessary general journal entries to record income tax expense and the tax effect of temporary differences. Present your workings for temporary differences in a table

Use the following format:

a)

Net Income before taxation
Add:
Less:
Taxable Income

b)

	Carrying Amount	Tax Base	Deductible Temporary Difference	Taxable Temporary Difference	DTA	DTL
Plant & equipment (at cost)
Accum depn. – Plant & Equipment
Goodwill (net)
Accounts receivable (net)
Interest receivable
Total assets
Employee provisions
Total liabilities
Net assets

General Journals

Answer 1

Statement of Taxable Income Amount ($)

Net Income Before Taxation	$67,450
ADD:
Impairment of goodwill	$45,000
Transfer to long service leave provision	$24,000
Depreciation of machinery	$15,000
Transfer to allowance for doubtful debts (291000-279000)	$12,000
Less:
Interest Not yet Received ( taxable when received)	($27,000)
long service leave provision Actual Paid ( Eligible for deduction)	($9,000)
Actual Bad Debts ( Eligible for deduction)	($3,000)
Taxable Income ( Answer)	$1,24,450