question archive 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

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

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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?

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Answer:

  • (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

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