International Financial Reporting Standards
Quiz:
Income taxes
Joint World Bank and IFRS Foundation ‘train
the trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
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Quiz: income taxes
2
Question 1: Entity has tax loss 30,000 in 20X8
and taxable profit 20,000 in 20X7. Tax rate 40%.
Tax loss can be carried back one prior year only
(no carryforward). Correct entry?
a. Debit Current tax asset
8,000
Credit Current tax income 8,000
b. Debit Current tax asset
12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability
8,000
d. Debit Deferred tax asset
8,000
Credit Deferred tax income 8,000
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Quiz: income taxes
3
Question 1: Tax loss 30,000 in 20X8 and taxable
profit 20,000 in 20X7. Tax rate 40%. Tax loss
carried back one prior year only. Correct entry?
a. Debit Current tax asset
8,000
Credit Current tax income 8,000
b. Debit Current tax asset
12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability 8,000
d. Debit Deferred tax asset
8,000
Credit Deferred tax income 8,000
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Quiz: income taxes
Question 2: Entity has tax loss 30,000 in 20X8.
Projected taxable profit for 20X9 is 20,000. Tax
rate 40%. Tax loss can be carried forward one
year only (no carryback). Correct entry?
a. Debit Current tax asset
8,000
Credit Current tax income 8,000
b. Debit Current tax asset
12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability
8,000
d. Debit Deferred tax asset
8,000
Credit Deferred tax income 8,000
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4
Quiz: income taxes
5
Question 2: Entity has tax loss 30,000 in 20X8.
Projected taxable profit for 20X9 is 20,000. Tax
rate 40%. Tax loss can be carried forward one
year only (no carryback). Correct entry?
a. Debit Current tax asset
8,000
Credit Current tax income 8,000
b. Debit Current tax asset
12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability 8,000
d. Debit Deferred tax asset
8,000
Credit Deferred tax income 8,000
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Quiz: income taxes
6
Question 3: At 31/12/X2 entity has an interest
receivable CU4,000 that will be taxable in X3
when received in cash. Tax rate 20% first 500,000
income and 30% on excess. Taxable profit in X2
= 450,000. Estimated taxable profit X3 = 550,000.
What is deferred tax liability 31/12/X2 for
receivable?
a. 1,200
b. 1,000
d. 836
e. 800
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c. 940
Quiz: income taxes
7
Ques. 3: What is deferred tax liability 31/12/X2 for
receivable?
a. 1,200
d. 836*
b. 1,000
c. 940
e. 800
Estimated effective tax rate = [(500,000
× 20%) + (50,000 × 30%)] ÷ 550,000 =
115,000 ÷ 550,000 = 20.91%.
4,000 × 20.91% = 836
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Quiz: income taxes
8
Question 4: Tax rate is 30% on operating profit,
0% on capital gains. In 20X1 entity has pre-tax
operating profit 50,000 and gain on sale of an
asset of 5,000. Entity believes gain is capital
gain, but small possibility (estimated 20%) that
tax authority says it is operating. What is current
tax liability at 31/12/X1?
a. 16,500
b. 16,200
c. 15,300
d. 15,000
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Quiz: income taxes
9
Question 4: What is current tax liability at 31/12/X1?
a. 16,500
c. 15,300
b. 16,200
d. 15,000
IAS 12 is silent on the treatment of uncertain tax
positions. One way of treating the uncertain tax
positions is to use probability weighted amounts:
CU50,000 x 30% = CU15,000 tax on oper. profit
(CU5,000 x 80% x 0%) + (CU5,000 x 20% x 30%)
= CU300 tax on capital gain
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Quiz: income taxes
10
Ques. 5: Which is the correct use of discounting
in measuring income tax assets and liabilities?
Choice Current tax
a
assets and
liabilities
Discounted
Deferred tax
assets and
liabilities
Not Discounted
b
Not Discounted
Discounted
c
Discounted
Discounted
d
Not Discounted
Not Discounted
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
Quiz: income taxes
11
Ques. 5: Which is the correct use of discounting
in measuring income tax assets and liabilities?
Choice
a
Current tax
assets and
liabilities
Discounted
Deferred tax
assets and
liabilities
Not Discounted
b
Not Discounted
Discounted
c
Discounted
Discounted
d
Not Discounted Not Discounted
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Quiz: income taxes
12
Question 6: Tax year ends 31 December.
By 30 September entity must pay provisional tax
based on prior year’s taxable profit.
Tax rate is 30%. For 20X4 taxable profit was
50,000. Consequently, on 30/09/20X5 entity paid
15,000 toward 20X5 taxes.
Taxable profit for 20X5 = 40,000.
•What is tax expense for 20X5?
•What is current tax asset at 20X5?
•What journal entry should be made at 31/12/X5?
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Quiz: income taxes
Question 6:
Tax expense 20X5: 30% x 40,000 = 12,000
Current tax asset at 31/12/20X5: 15,000 paid
minus 12,000 owed. Tax asset is a receivable
from the tax authority.
Journal entry at 31/12/20X5:
Debit current tax asset
3,000
Credit tax expense*
3,000
*Assumes that on 30/09/20X5 the debit for the
15,000 payment was to ‘tax expense’.
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Quiz: income taxes
14
Question 7:
Entity A purchased an item of PPE on 1 January
20X1 for CU1,000. The estimated useful life of the
PPE is 10 years and the residual value was
estimated to be zero. These estimates have not
changed.
The tax authorities in the jurisdiction in which
Entity A operates grant allowances over five
years for such PPE.
The applicable tax rate is 30 per cent.
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Quiz: income taxes
Question 7 continued:
At 31 December 20X1, the deferred tax balance
and profit or loss effect are:
a. Liability of CU30, income of CU30
b. Asset of CU30, income of CU30
c. Liability of CU30, expense of CU30
d. Asset of CU30, expense of CU30
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Quiz: income taxes
Question 7 continued:
At 31 December 20X1, the deferred tax balance
and profit or loss effect are:
a. Liability of CU30, income of CU30
b. Asset of CU30, income of CU30
c. Liability of CU30, expense of CU30
d. Asset of CU30, expense of CU30
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Quiz: income taxes
17
Question 8:
The facts are the same as Question 7.
On 31 December 20X1, Entity A revalued the asset
to CU1,300.
What journal entry should be processed in the
financial records of Entity A to account for the tax
effect of the revaluation?
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Quiz: income taxes
18
Question 8:
Dr Asset—PPE CU400
Cr Income—OCI: revaluation gain CU280
Cr Deferred tax liability
CU120
CU1,300 revalued amount – CU900 previous carrying
amount = CU400.
CU400 increase in carrying amount x 30% = CU120
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Quiz: income taxes
19
Question 9:
The facts are the same as Question 8.
What journal entry should be processed in the
financial records of Entity A to account for the tax
effect of the 20X2 depreciation of the PPE?
The estimates of estimated useful life and
residual value remain unchanged.
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Quiz: income taxes
20
Question 9:
Dr Expense—profit or loss: depreciation CU144
Cr Asset—PPE
CU144
CU1,300/9 years = CU144
Dr Expense—profit or loss: deferred tax CU17
Cr Deferred tax liability
CU17
(CU144 accounting depreciation less CU200 tax
depreciation) x 30% = CU17
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Quiz: income taxes
21
Question 10:
• Entity A owns a piece of land classified as PPE.
The land is not depreciated and is measured
using the revaluation model in IAS 16.
• On 1 January 20X1 the entity bought the land for
CU1,500 (ie historical cost).
• On 31 December 20X1 the land was revalued to
CU2,000.
• The applicable tax rate for operating profits is
30%. Proceeds on sale in excess of historical
cost are taxed only at 15%
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Quiz: income taxes
22
Question 10 continued:
•At what rate should the tax consequences of the
revaluation of the land be measured?
a. 30 per cent
b. 15 per cent
c. No tax consequences as the land is a nondepreciable asset
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Quiz: income taxes
23
Question 10 continued:
•At what rate should the tax consequences of the
revaluation of the land be measured?
a. 30 per cent
b. 15 per cent
c. No tax consequences as the land is a nondepreciable asset
Reason: the land can only be recovered through sale.
It is not consumed in the process of generating
income.
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Questions or comments?
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members of the IASB and its staff
are encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB on
accounting matters are determined
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1
January 2012 with an effective date after 1 January 2012
but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the
publishers do not accept responsibility for loss caused to
any person who acts or refrains from acting in reliance on
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loss is caused by negligence or otherwise.
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