Topic 8 Accounting for Income Tax Self Study Questions Solutions
ACCT2011: Financial Accounting A
BUSINESS SCHOOL
1. H&P Q9.15 page 312
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2. H&P Q9.16 page 312
3. H&P Q9.18 page 313
4. H&P P9.7 page 316
5. Comprehensive Question See Topic 8 Canvas for question, solution and video
Homework Questions 1. H&P Q 9.15 page 312
a) The carrying amount of an asset is the amount at which it is recorded in the accounting records as at a particular date. In the case of depreciable assets, it is the amount after deducting accumulated depreciation. In the case of accounts receivable, it is the amount after deducting the allowance for doubtful debts.
b) The deductible amount of an asset is the future allowable deductions arising from the asset under income tax law. For example, deductible amounts include future depreciation to be allowed for tax purposes.
c) The assessable amount of an asset is the assessable income expected to arise from the asset under
income tax law. Assessable income arises from the use and/or sale of the asset. For assets that represent costs carried forward, there is an expectation that these assets will generate sufficient future revenue to cover their carrying amount. For most assets, assessable amount will be equal to their carrying amount.
d) According to AASB112, the tax base of an asset is either the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset; or the carrying amount where the economic benefits will not be taxable.
2. H&P Q9.16 page 312
Under the statement of financial position approach, a temporary difference is a difference between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences are either deductible or taxable depending on whether the difference results in a future deductible amount or a future taxable amount. The difference between the carrying amount and the tax base of an asset or a liability will disappear over time, hence the title ‘temporary difference’. AASB 112 specifies that taxable temporary differences give rise to deferred tax liabilities and deductible temporary differences give rise to deferred tax assets. AASB 112 offers some examples (paras 7 and 8) to illustrate this difference.
3. H&P Q9.18 page 313
A provision for long-service leave will result in a temporary difference and a deferred tax asset. The carrying amount of the liability is the amount that has been recognised as an expense but not yet paid to the employees (say $100). This amount is tax deductible when the leave is taken and the amount is paid. The tax base is:
Carrying amount $100 less future deductible amount 100 Tax base nil
The carrying amount of the liability is $100 and its tax base is nil. There is, therefore, a deductible temporary difference of $100. The carrying amount of the liability is greater than its tax base (deductible amount > assessable amount) and there is, therefore, a deferred tax asset.
4. H&P P9.7 page 316
(a) Determinethecarryingamount,taxbaseandanyrelateddeferredtaxinrelationtothisassetasat 30 June 2018 and 30 June 2019. Show all workings.
The revaluation occurred on 1 July 2018, one year after acquisition of the asset. Depreciation prior to revaluation:
• Depreciation for accounting $500 000/4 = $125 000 pa
• Depreciation for tax $500 000 × 40% reducing balance = $200 000 (yr 1) Depreciation after revaluation:
less accumulated depreciation Asset – net
Balance as at 30/6/2018 Balance as at 30/6/2017 Change in DTL
less accumulated depreciation Asset – net
Balance as at 1/7/2018 Balance as at 30/6/2018 Change in DTL
less accumulated depreciation Asset – net
Balance as at 30/6/2019 Balance as at 1/7/2018 Change in DTL
Depreciation for accounting $420 000/3 = $140 000 pa
Depreciation for tax $500 000 – $200 000 = $300 000 × 40% = $120 000 (yr 2)
Carrying amount
500 000 (125 000) 375 000
420 000 (0) 420 000
420 000 (140 000) 280 000
500 000 (200 000) 300 000
500 000 (200 000) 300 000
500 000 (320 000) 180 000
For financial year ended 30/6/2018
22 500 0 ∆↑22 500
At date of revaluation 1/7/2018
For financial year ended 30/6/2019
(b) Show the general journal entries to record current and deferred income tax for the reporting periods ended 30 June 2018 and 30 June 2019.
General journal entries as at 30 June 2018
Current income tax expense Dr $75 000
Current tax liability Cr $75 000
(To record current income tax expense and current tax liability, $250,000 × 30%)
Deferred income tax expense Dr $22 500
Deferred tax liability Cr $22 500 (To record increase in DTL on Asset from $0 to $22 500)
General journal entries as at 1 July 2018
Accumulated depreciation Dr $125 000
Asset Cr $125 000 (Write-back the accumulated depreciation at date of revaluation)
Asset Dr $45 000
Revaluation surplus Cr $45 000
(Revalue asset to fair value of $420 000 from carrying amount of $375 000)
Revaluation surplus Dr $13 500
Deferred tax liability Cr $13 500 (To record deferred tax effect from asset revaluation)
General journal entries as at 30 June 2019
Current income tax expense Dr $96 000
Current tax liability Cr $96 000
(To record current income tax expense and current tax liability, $320 000 × 30%)
Deferred tax liability Dr $6 000
Deferred income tax expense Cr $6 000 (To record deferred tax effect on depreciable asset)
(c) Show the general journal entries (including any deferred tax consequences) to revalue the asset on 1 July 2018 and dispose of it on 1 July 2019.
Cash at bank Accumulated depreciation Loss on sale of asset Asset
(To record sale of asset)
Revaluation surplus
Retained earnings
(Transfer the net revaluation surplus to retained earnings on sale of asset)
Dr $125 000 Dr 140 000 Dr 155 000
Cr $420 000
Dr $31 500
Cr $31 500
The net effect of the asset sale is a loss of $155 000. Paragraph 68 of AASB 116 requires the gain or loss on sale to be included in the statement of comprehensive income. The net revaluation surplus is $45 000 – $13 500 tax effect = $31 500. On sale of an asset, AASB 116 paragraph 41 requires the revaluation surplus to be transferred to retained earnings.
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