TutorialSolutions_Week02_IncomeTax
ACCT2542 – Corporate Financial Reporting and Analysis
Session 2, 2009
Solutions to Tutorial Questions for Tutorials held in: Week 2 – Accounting for Income Tax PLEASE NOTE THAT THESE SOLUTIONS ARE NOT AVAILABLE TO STUDENTS UNTIL THE END OF ALL RELEVANT TUTORIALS
WEEK 2 (July 27 – 31): Accounting for Income Tax
Picker Problem 6.3 – Manchester Ltd
Change in tax rate
Adjusting journal entry:
Dr. Deferred Tax Liability 18 200
Cr. Deferred Tax Asset 7 400
Cr. Income Tax Expense 10 800
(being recognition of change of tax rate)
Working
DTA DTL
Opening balance at previous tax rate $29 600 $72 800 Divide by previous tax rate ÷ 40% ÷ 40% Equals opening temporary differences balances $74 000 $182 000
30% Multiply by new tax rate x 30% x Opening balance at new tax rate $22 200 $54 600
Adjustment for change in tax rate (7,400) (18 200) (Difference between opening balances at previous decrease decrease and new tax rates)
Calculation
Alternative
Opening balance at previous tax rate $29 600 $72 800 Adjustment for change in tax rate: (40-30)/40 (7 400) (18 200) Adjusted opening balance $22 200 $54 600
Manchester Ltd
Current Tax Worksheet
(for year ended 30 June 2005)
Accounting profit $920 000 Add:
Impairment - goodwill $20 000
Amortisation – development expenditure 64 000
Depreciation - buildings 29 000
Depreciation - plant 70 000
Warranty expense20 000
Doubtful debts expense 15 000
Long service leave expense 8 000 226 000 Deduct:
Exempt income 126 000
Bad debts written off 14 000
Warranty repairs paid 22 000
Development costs – additional deduction 30 000
Development costs paid 120 000
Depreciation of plant for tax [285-180] 105 000 (417 000) Taxable profit 729 000 Current tax liability @ 30% $218 700
The entry for current income tax is:
Dr. Income Tax Expense 218 700
Cr. Current Tax Liability 218 700
1. Development expenditure
Development expenditure asset (at cost)
$ $ 1/07/04 Balance b/d 200 000
Costs paid 120 000Balance c/d 320 000
000
320
000320 Additional deduction for development costs is 25% of $120 000 = $30 000
2. Development expenditure
Development expenditure contra-asset (Accumulated amortisation)
$ $
1/07/04 Balance b/d 80 000 Balance c/d 144 000Amortisation exp 64 000
000
144
000144
3. Doubtful debts expense can be found by reconstructing the allowance for doubtful debts account,
given that the balance of the account increased by $1 000 over the year:
Allowance for Doubtful Debts
$ $ 30/06/05 Debts written off 14 000 1/07/04 Balance b/d 12 000 Balance c/d 13 00030/06/05 Doubtful debts 15 000
000
27
00027
1/7/05 Balance b/d 13 000
4. To calculate warranty expense
Provision for Warranty
$ $ 30/06/05 Warranty costs 22 000 1/07/04 Balance b/d 34 000 Balance c/d 32 00030/06/05 Warranty expense 20 000
000
00054
54
1/7/05 Balance b/d 32 000
Manchester Ltd
Current Tax Worksheet (Alternative With Shortcuts)
(for year ended 30 June 2005)
Accounting profit $920 000 Adjust for Permanent Differences
Add: Impairment - goodwill 20 000
Add: Building depreciation 29 000
Deduct: Exempt income (126 000)
Deduct: Development costs – additional deduction (30 000) (107
000) Accounting profit subject to tax 813,000 Adjust for Timing Differences
Add: Increase in allowance for doubtful debts 1 000
Add: Increase in provision for long service leave 8 000
Deduct: Decrease in provision for warranty (2 000)
Deduct: Increase in development asset (net) (56 000)
Deduct: Excess of tax depreciation over accounts depreciation for plant (35 000) (84
000)
Taxable profit 729 000 Current tax liability @ 30% $218 700
Manchester Ltd Deferred tax worksheet as at 30 June 2005
Carrying Amount Future
Taxable Amount
Future Deductible Amount Tax Base
Taxable Temporary Differences Deductible Temporary Differences
$ $ $ $ $ $ Relevant Assets Accounts receivables 222 000 0 13 000 235 000 13 000 Plant 410 000 (410 000) 315 000 315 00095 000 Buildings 701 000 (701 000) 0 0 701 000 Development Costs 176 000
(176 000)
0 0 176 000
Relevant Liabilities Provision for Warranty 32 000 0 (32 000) 0 32 000 Provision for Long service leave 36 000 0 (36 000)
0 36 000
Total Temporary Differences 972 000 81 000 Exempt differences (701 000)
-
Temporary differences 271 000 81 000 Deferred tax liability 81 300 Deferred tax asset 24 300 Beginning balances
(72 800) (29 600) Adjustment for tax rate change* 18 200 7 400 Adjustment
26 700
Cr
2 100 Dr
* refer Tax Rate Change journal in first part of question.
The entry for the movement in the deferred tax balances for the year is as follows: Dr. Income Tax Expense 24 600 Dr. Deferred Tax Asset 2 100 Cr. Deferred Tax Liability 26 700