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?

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