At 30 June 2016, Grace Ltd had the following deferred tax balances: Deferred tax liability Deferred tax asset $18 000 15 000 Grace Ltd recorded a profit before tax of $80 000 for the year to 30 June 2017, which included the following items: Depreciation expense – plant Doubtful debts expense Long-service leave expense $7 000 3 000 4 000 For taxation purposes the following amounts are allowable deductions for the year to 30 June 2017: Tax depreciation – plant Bad debts written off $8 000 2 000 Depreciation rates for taxation purposes are higher than for accounting purposes.
A corporate tax rate of 30% applies. Required A. Prepare a current tax worksheet to determine the taxable income for the year to 30 June 2017.
B. Determine by what amount the balances of the deferred liability and deferred tax asset will increase or decrease for the year to 30 June 2017 because of depreciation, doubtful debts and long-service leave.
C. Prepare all journal entries to account for income tax assuming recognition criteria are satisfied.
D. What are the balances of the deferred tax liability and deferred tax asset at 30 June 2017?
(A)
Current Tax Worksheet for year ended 30 June 2017 | ||||
Profit before income tax | 80,000 | |||
Add: | ||||
Doubtful debt expense | 3000 | |||
Depreciation expense (Plant) | 7000 | |||
Long service leave expense | 4000 | 14000 | ||
94000 | ||||
Deduct: | ||||
Bad debts written off | 2000 | |||
Long service leave paid | - | |||
Tax depreciation - plant | 8000 | -10000 | ||
Tax loss | 84000 | |||
Current Tax liability @30% |
25200 |
(B)
Deferred tax for the year | |||||
Tax depreciation greater than Depreciation expense | |||||
→ | Accumulated depreciation for tax purposes greater than for accounting purposes | ||||
→ | The carrying amount of the depreciable asset is greater than the tax base | ||||
→ | Deferred tax liability | ||||
Increase in deferred tax liability = ($8 000 –$7 000) x 30% = $300 | |||||
Doubtful debts expense greater than bad debts written off | |||||
→ | Allowance for doubtful debts for accounting purposes but not tax purposes | ||||
→ | The carrying amount of accounts receivable is less than the tax base | ||||
→ | Deferred tax asset | ||||
Increase in deferred tax asset = ($3 000 –$2 000) x 30% = $300 | |||||
Long service leave expense greater than long service leave paid | |||||
→ | provision for long service leave for accounting purposes but not tax purposes | ||||
→ | The carrying amount of the liability is greater than the tax base | ||||
→ | Deferred tax asset | ||||
Increase in deferred tax asset = ($4 000 –$0) x 30% = $1 200 |
(C)
Tax entries for 30 June 2017 | ||||
The journal entry for current tax is: | ||||
Income tax expense | Dr. | 25200 | ||
Current tax liability | Cr. | 25200 | ||
The journal entry for deferred tax is: | ||||
Deferred tax asset | Dr. | 1500 | ||
Deferred tax liability | Cr. | 300 | ||
Income tax expense | Cr. | 1200 | ||
Current tax | 25200 | |||
Deferred tax from origination | -1200 | |||
and reversal of temporary differences | ||||
Income Tax expense | 24000 |
(D)
Deferred tax balances at 30 June 2017 | |||||
Deferred Tax Liability | |||||
$ | $ | ||||
01-07-2016 | Beginning balance | 18000 | |||
30-06-2017 | Ending balance | 18300 | Income tax expense | 300 | |
18300 | 18300 | ||||
Deferred Tax Asset | |||||
$ | $ | ||||
01-07-2016 | Beginning Balance | 15000 | |||
Income tax expense | 1500 | 30-06-2017 | Ending Balance | 16500 | |
16500 | 16500 |
At 30 June 2016, Grace Ltd had the following deferred tax balances: Deferred tax liability Deferred...
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