ACCOUNTING FOR TAXES ON
INCOME 973
ONCEPT QUESTIONS
l.l
Explain how a deferred tax liability and a deferred tax asset conform to the definitions ofa liability
an asset in the IFRS Framework.
1.2
Explain the concept of a taxable temporary difference.
1.3
Explain the concept of a deductible temporary difference.
1.4 In your view, is tax
1.5
Describe,
expense an "expense" or a'?istribution of income"? Explain.
in your own words, the methodology of deferred tax accounting.
1.6 What may cause the "effective tax rate" of an entity to be different from the entity's statutory
:ate?
1.7 Provide
examples of situations where the taxable or deductible temporary difference should not
::cognized.
1.8 Explain the rationale for the treatment of tax
1.9 How may
losses under IAS 12.
an investor use the information on deferred taxes in financial analysis of an entity?
l.l0 In your opinion,
is the information reported on deferred taxes relevant for decision-making?
gin.
OBTEMS
I
Bolonce sheet liobility opprooch ond onolyticol check
ls of assets and liabilities of Company XYZ are as follows:
:ixed
assets
Date purchased
cost
..
Useful life
Residual value
.
......
1 January 20x1
Sl,ooo,ooo
10 years
5100,000
974
ADVANCED FINANCIAL ACCOUNTING
Depreciation is on a straight line basis. Capital allowances of $1,000,000 are recognized in full in 20xlRecovery of residual value will be taxed when the fixed assets are disposed of.
(b) Development
(f)
Inv
expenditures
Completion of development ..
Cost of development
Useful life
.
1 January 20x1
s600,000
3 years from 1 January 20x3
Development expenditures qualify as an asset under IAS 38 Intangible Assels and are not tax deductitia
Inv
Amortization is on a straight line basis.
Unr
mo
(c) Provision for warranties
Balance at 1 January.
s7s,000
Utilization
560,000
50,000
(3s,000)
Balance at 31 December........
s7s,000
5e0,000
Expense
(o)
\b/
Di
(h)
Tax
(i)
Pro
60,000
(4s,000)
Warranties are deductible for tax purposes when claims are made.
(d) Interest receivable
Balance at 1 January.
s60,000
Expense
Utilization
50,000
(3s,000)
Balance at 31 December........
57s,000
590,000
s60,000
480,000
s20,000
600,000
Re4uirer
(s20,000)
(s80,000)
Usir
s20,000
540,000
57s,000
60,000
(4s,000)
(i) Cur
Interest income is taxed when earned.
(e) Rental revenue received
in
advance
Balance at 1 January.
Cash received.
Revenue earned .
Balance at 31 December
Revenue is taxed at the point of receipt.
l.
each
l-l-
3r
I
Detr
Pertr
ACCOUNTING FOR TAXES ON
(i)
INCOME 975
Investment property
Balance at
i
SO
January.
Acquired at cost.
Fair value adjustment.
Balance at 31 December........
ss,s00,000
5,000,000
0
500,000
(700,000)
ss,s00,000
54,800,000
Investment property is carried at fair value. Changes in fair value are taken to Income Statement.
Unrealized change in fair value is not taxed. Profit on sale is tax-exempt. Assume that the business
model is to primarily hold the property to collect rents.
)
Disallowed items included in net income
Capital expenses
....
$60,000
572,000
s2s,000
530,000
t Tax exemptions and reliefs granted
Tax-exempt interest.
Profit before tax
Profit before
tax....
s
1
,000,000
s
1
,200,000
Current tax payable and tax rates
Current tax payable.
Tax rates.
Tax rates for 20x1 was also 22o/o
s 1 32,000
s4s3,400
22o/o
20o/o
.
Using the balance sheet liability approach, and showing the carrying amount and the tax base for
each asset and liability, determine the deferred tax liability (asset) balance as at 31 December 20x1,
31 December 20x2, and 31 December 20x3 for CompanyXYZ. Explain the tax base in each instance.
Determine the tax expense for 20x2 and 20x3.
Perform the analytical check on tax expense for 20x2 and 20x3.
976
Pl
ADVANCED FINANCIAL ACCOUNTING
1.2
Comprehensive problem
Company A recorded a profit before tax of $2,500,000 for the year ended 31 December 20x3. The ta\ rE
for 20x3 was 24o/o while that of 20x2 was 22o/o. Deferred tax liability as at 3l December 20x2 was 526-{(r
1 lanuary 20x1, Company A purchased plant and machinery costing $120,000. The useful
the plant and machinery was five years, but the capital allowances were to be claimed over a
(a) On
lift 'r
thr*-
year period.
20x2, Company A purchased specialized equipment costing $150,000. The useful life of :t
equipment was five years from the date of acquisition. However, for tax purPoses, capital allortar--tl
(b) On I luly
were claimed in full during 20x2.
-,i
Company A completed the development phase of a new drug on 1 fanuary 20x2, which amountal
$50,000. The expenditures were not deductible for tax purposes but were deemed to have an econolLr
useful life of five years for accounting purposes.
(d) The movement in the provision for impairment losses is as follows:
(c)
You
20x2
Balance at 1 January.
5ss,000
Expense
Utilization
30,000
(50,ooo)
Balance at 31 December........
s3s,000
(a)
hl
d
Fir
Impairment losses were allowable for tax purPoses in the period of utilization.
during 20x3 amounted to $50,000 while dividend income for 20x3 was $60,0tr-,
Dividends receivable as at 1 fanuary 20x3 were $20,000. Dividend income was taxed when receir-e.i
(f) Unearned revenue balance arising from service fees collected in advance as at 31 December 20x3 r.-a*
$14,000. Cash received during the year in respect of unearned revenue was $32,000. Earned revenlr
from service fees for 20x3 was $30,000. Service fees were taxable during the year when the proce*is
(e) Dividends received
were received.
Dq
Sin
isl
(b)
De
(g) Disallowed items are as follows:
Entertainment expenses
Donations to non-qualifying charities.
Disallowed transport expenses.
..
S 9,600
9,500
13,000
Der
(h) Tax-exempt income and reliefs granted
Thr
are as follows:
(i)
income.
Double-deductions . .
Tax-exemDt
514,000
65,000
(ii
)
ACCOUNTING FOR TAXES ON
INCOME 977
ired:
3l December 20x3 based on the above information.
Using the balance sheet liability approach, show the cumulative taxable (deductible) temporary
differences arising from each asset or liability as at 3l December 20x3.
Determine the deferred tax liability as at 31 December 20x3.
Perform the analytical check on tax exPense fot 20x3.
Prepare the tax computation for the year ended
.3
Accounling for lox losses
instead of a profit, Company A recorded a loss of $1,000,000 for 20x3, what
.d be the tax expense or credit for 20x3 assuming that future profitability is not assured? In your own
is, explain how the accounting of deferred tax assets differ from that of deferred tax liabilities.
r to Problem
.1
11.2.
If
Comprehensive problem
rave been assigned to prepare the deferred tax computations for Co A for the years ended 31 December
and 20x3. The following details relate to Co Ab assets and liabilities.
FLxed assets
purchased.......
...
life.
..
1 January 20x1
Date
Cost
Useful
Residual value
5100,000
5 Years
51
0,000
)epreciation is on a straight line basis. Capital allowances of $100,000 are claimed in full in 20x1.
>ince
full capital allowances are given on the cost of the asset, any residual value recovered on disposal
-s taxable.
)evelopment expenditures
Cost of development
Useful life.
)evelopment expenditures are capitalized as intangible
lhe following tax deductions are allowed:
:)
j)
$100,000 on
$100,000 on
I
I
fanuary 20x3
fanuary 20x4
5200,000
4 years from
assets.
.l
January 20x3
Amortization is on a straight line basis.
978
(c)
ADVANCED FINANCIAL ACCOUNTING
Provision for warranties
Balance at
I
The
tn
no
January.
530,000
Expense
45,000
s2s,000
s0,000
Utilization
(s0,000)
(60,000)
Balance at 31 December........
s2s,000
s
1s,000
Warranties are deductible for tax purposes when claims are made.
(d) Interest
receivable
(h)
Balance at 1 January.
s200,000
s 70,000
Interest income.
Interest received.
100,000
(230,000)
120,000
(180,000)
Balance at 31 December.......
5
5 10,000
70,000
Tax
(i) Profr
Interest income is taxed when received.
(e) Unearned revenue
(j)
Balance at 1 January.
Cash received
Revenue earned .
s 1 00,000
Balance at 31 December........
5
60,000
s40,000
60,000
20,000)
(70,000)
40,000
s30,000
(1
Tax
Revenue is taxed at the point of receipt.
(f)
Req
Financial assets
1.P
L.
a
Balance, at cost.
Fair value adjustment.
Balance, at fair value.
5
51
80,000
20,000
$
00,000
s
1
(a)
80,000
40,000
(b)
20,000
+.
ACCOUNTING FOR TAXES ON
INCOME 979
The asset was acquired during 20x2. Fair value adjustment of $20,000 was taken to income statement
in each of the two years. Income from the sale of financial asseis is taxable. As of 31 December 20x3,
no sale has been made of the financial
assets'
Disallowed items included in net income
Penalties and fines.
Entertainment expenses
Motor vehicles exPenses........
5
s
'14,000
1,400
10,000
12,000
s 1 6,200
530,000
5,700
12,000
s,ooo
1,200
Tax exemptions and reliefs granted
Double deduction on trade fair
expenses.
Tax-exempt interest.
Profit before tax
Reported profit.
.
s850,000
s900,000
Tax rates
Current tax rates.
Deferred tax liability balance as at 31 December 20xl was $38,000. The tax rate was
25o/o
as al
3l
December 20x1.
Prepare the tax computation for the years ended 31 December 20x2 and 20x3.
Using the balance sheet liability approach, and showing the carrying amount and the tax base for each
asset and liabiliry determine the deferred tax liability balance as at:
a) 31 December 20x2; and
b) 3l December 20x3.
Prepare the journal entries to record the tax expense for 20x2 and 20x3.
Perform the analltical check on tax expense for 20x2 and 20x3.
9BO
Pl
1.5
ADVANCED FINANCIAL ACCOUNTING
(e)
Comprehensive problem
Co X was incorporated on 1 January 20x0. Details of assets and liabilities of Co X as at
3l
Lo
Decembtr
20x1 were as follows:
(a) Fixed
assets
purchased.......
Cost...
Useful life.
Date
Residual value (taxable when
R.r
1 January 20x1
sold)
5240,000
10 years
..
(f)
Int
520,000
Depreciation is on a straight line basis. The capital allowances are as follows:
(i)
(ii)
(iii)
$80,000
$80,000
$80,000
(b) Intangible
in 20x1
tn 20x2
in 20x3
asset
Int,
Date of purchase
Cost of development
Useful life.
Amortization is on a straight line
(c) Accounts
basis.
1 January 20x1
s400,000
(g) un
5 years
No tax deductions are allowed on the
asset.
receivable
Exc
Balance at year-end
Revenue is taxed
in the year when
s
1
00,000
s200,000
(h)
Pro
(i)
Tax
sales are made.
(d) Provision for impairment losses
Balance at 1 January.
lmpairment expense.
Utilization of provision.
s
Balance at 31 December........
s
20,000
30,000
s
2s,000
60,000
(2s,000)
(70,000)
2s,000
s l spoo
Require'
Tax deduction is allowed on actual utilization of the provision.
i.
2.
Prel
Usn
ASSE
ACCOUNTING FOR TAXES ON
INCOME 987
Loan payable
Balance at year-end
51
$6s0,000
,000,000
Repayment of loans is a capital transaction and is not tax deductible.
Interest payable
Balance at 1 January.
Interest expense.
Interest paid.
.
5240,000
190,000
(300,000)
.
Balance at 31 December........
51
51
30,000
60,000
(1s0,000)
s 40,000
30,000
Interest expense is deductible when paid.
Unrealized exchange gain
Unrealized exchange gain included
in year-end
Exchange gain
debtors
..
520,000
518,000
is realized in the following year and is taxed in the period of realization.
Profit before tax
Profit before tax for
Profit before tax for
20x1
20x2
51,000,000
750,000
Tax rates
December 20x0...
December 20x1
As at 31 December 20x2 ...
As
As
at
at
31
31
'l8o/o
2Oo/o
22o/o
Prepare the tax computation for the years ended 31 December 20xl and20x2.
Using the balance sheet liability approach, and showing the carrying amount and the tax base for each
asset and liability above, determine the deferred tax liability balance as at:
942
ADVANCED FINANCIAL ACCOUNTING
(a) 3t December 20x0;
(b) 31 December 20x1r
(c) :t December 20x2.
3.
4.
Pl
and
Show the journal entries to record tax expense.
Show the analytical check on tax expense for 20xl and 20x2.
1.6
Accounting for tox losses
If the financial statements for 20x2 showed a pre-tax loss of $600,000 instead of a profit o;
$750,000, what would be the journal entry for tax expense for 20x22. Assume that there is no reasonabk
assurance of future profitability and that the company will continue to be loss-making in the foreseeat're
Refer to PI1.5.
future.
Pll.7
Comprehensive problem
Co Q requires your assistance to complete its deferred tax and tax expense calculation for the year endc
31 December 20x2. The following schedules are provided to you below:
(a) Tax computation for the year ended 31 December 20x2.
(b) Schedule of taxable (deductible) temporary differences for 20x2.
Required:
l
Complete the schedule of taxable (deductible) temporary differences by indicating on the blank
whether the item is a taxable temporary difference (TTD) or a deductible temporary difference (DTD
and the amount for that item. If the temporary difference is not to be recognized under IAS t2 Inconut
2.
If the statutorytax rate for 20x1 is20o/o, and if there are no additions or disposals of fixed assets, shorthe journal entries for Co Q for 20x2.
If the profit before tax of $750,000 was a loss of $1,000,000, show the journal entries for Co Q ttr
Taxes, state clearly.
3.
20x2.
Profitbeforetax.....
Add back depreciation on plant and equipment ...
5750,000
..
.
s100,000
Less: Capital allowances
Add back depreciation on motor vehicles
Less: Capital allowances
0
s
0
Add back warranty expense.
Less; Actual claims. .
S 8o,ooo
Earned income......
Add: Unearned income received.
5 (9s,000)
Taxable income
Tax rate
Current tax payable
100,000
12,000
(100,000)
45,000
12,000
(20,000)
(s0,000)
5792,000
Pl
tl
22o/o
5174,240
has
rel
ACCOUNTING FOR TAXES ON INCOME
983
1. Plant and equipment
Carrying
31 De< 2Ox2
amount.
5300,000
Tax base
Capital allowances were fully claimed in the year of purchase.
2. Motor vehi<les
31 Dec 20x2
Carrying amount.
s96,000
Tax base
Capital allowances are not granted on these vehicles.
3. Loan payable
31 Dec 20x2
Carrying amount.
s200,000
Tax base
Loan payable is the principal amount repayable at the end of 20x6.
4. Provision for warranties
31 Dec 20x2
Carrying amount
s20,000
Tax base
Tax deduction is allowed on
actual utilization of the provision.
5. Prepaid expense
31 De< 2Ox2
Carrying amount
Tax base
ss,000
The expense is deductible in the year when expensed.
6. Unearned revenue
31 Dec 20x2
Carrying amount.
s20,000
Tax base
Revenue is taxed when received.
Comprehensive problem
ny X seeks your assistance to determine its tax expense under IAS 12 Income Taxes. The accountant
provided you with a schedule below of carrying amounts of assets and liabilities and information
to the tax treatments of the items. The accountant also provided the tax computation for the
ial year ended 31 December 20x3.
984
ADVANCED FINANCIAL ACCoUNTING
Complete the schedule. Indicate clearly whether a taxable or deductible temporary difference exists lbr
each item. If the temporary difference is not to be recognized under IAS 12, state clearly.
Item
l. Co nstructi o n Work-i n-prog ress
Construction costs to date
Construction orofit to date
Construction work-in-progress.....
Carrying
amount.
Amount
51
2,000,000
700,000
Tax treatment
Construction profit is taxed at the
point of completion of project.
S12,700,000
512,700,000
Tax base
2. Provision for restructuring costs
Carrying amount.
S150,000
Restructuring costs are not
deductible for tax purposes.
s300,000
Capital allowances were fully
claimed in the first year of purchase
Tax base
3. Fixed ossets
Net book value ..
Tax base
l.
Original cost was 5500,000.
2.
4. lnterest receivable
Carrying
Tax base
amount......
s70,000
Interest is tax-exempt.
s80,000
Rental income is taxed in the
period when earned.
5. Rent receivable
Carrying
Tax base
amount.......
5. Uneorned income
Carrying amount.
590,000
7. Financial dssets dt fair value through profit or loss
Carrying amount at fair value
Tax base
Unearned income is taxed at the
point of receipt.
Tax base
S150,000
Gains are taxed at the point of sale
The original purchase price of the
asset is S120,000.
8. Deferred development costs (FRS 38)
Carrying amount.
Tax base
540,000
Non-deductible expense
ACCOUNTING FOR TAXES ON INCOME
The tax computation for Company X for the year ended
3l Dec 20x3 is shown below:
Profitbeforetax.....
Construction orofit.
Add back deoreciation on fixed assets
985
s1,000,000
(s00,000)
Less;
100,000
.
Less: Caoital allowances
Tax-exemot interest.
Earned income.. . .. . .
Add. Unearned income received during the year
Less: Gain in fair value of financial assets..
Add: Loss in fair value of financial assets .
Taxable gain on sale of financial assets.
0
(70,000)
(70,000)
..
90,000
.
(30,000)
10,000
10,000
Disallowed amortization on deferred training costs..
Disallowed charge for restructuring costs. ..
.
20,000
30,000
ss90,000
Taxable income
Tax rate
Tax payable
2oo/o
r 18,000
red:
Determine the tax expense of Company X for the year ended 31 December 20x3. Tax rate for 20x2 is
22o/o. Prepare the journal entry.
Perform an analytical check of the tax expense.
1.9
Comprehensive problem ond disclosures
Co, a magazine publisher, reported net profit before tax of $ 1 ,300,000 for the year ended 3 I December
1. The only disallowed expenses were the depreciation on private motor vehicles and disallowed upkeep
maintenance expenses on the motor vehicle of $3,000. Tax rate as at 3l December 20xl was l7o/o while
tax rate as at 31 December 20x0 was l8%.
information:
(1) Prism bought printing equipment on I fanuary 20x0. The original cost was $480,000 and the
economic useful life was five years. Capital allowances were claimed over three years from I
fanuary 20x0.
(2) A motor vehicle owned by Prism did not qualify for capital allowance claims. The economic useful
Iife was ten years and the residual value was $50,000. As at 3l December 20x0, two years had
expired from its initial purchase date.
(3) Prism Co received magazine subscriptions from customers in advance and recognized the receipts
as unearned revenue. Subscription revenues are taxable in the period when magazines are delivered.
Prism recorded the followine in 20x0 and 20x1.
Carrying amount of unearned revenue at 31 December
Revenue earned during the year....
Revenue received during the year ...
.......
s130,000 5140,000
s140,000 s 80,000
51 20,000 s 90,000
986
ADVANCED FINANCIAL ACCOUNTING
Required:
1.
Determine the taxable temporary differences and deductible temporary differences as
3l
2.
3.
4.
Pl
l.l0
I
December 20x0 and 31 December 20x1.
Determine the tax expense for the year ended 31 December 20x1.
Prepare the journal entry to record the tax expense for the year ended 31 December 20x1.
Prepare the disclosure requirements to show the following:
(a) An explanation of the relationship between tax expense and accounting income by wa,v ot e
numerical reconciliation between tax expense and the product of accounting profit multiplid
by the applicable tax rate; and
(b) The amount of the deferred tax assets and liabilities recognized in the statement of finan.ii
position for each type of temporary differences.
Speciol situotions
CoXYZ recognized issued compound financial instruments in accordance with IAS 32 Financial Instrumen:;
Presentation, and purchased investment property in accordance with IAS 40 Investment Property using the
fair value model and elected to carry equity instruments at Fair Value through Other Comprehenshc
Income (FVOCI) in accordance with IFRS 9 Financial Instruments.
Compou
lssue
n
d f i n d n ci a I
in
stru m e nt s:
date
.. l
from issue of bonds
Fair value of the bonds without the equity option
Proceeds
Principal amount
Effective interest rate
Januarv 2Oxl
SfZ,OOO,OOO
.
S10,2OO,OOO
511,000,000
..
Couponinterestrate...
.
6.760/o
5o/o
Income tax rate
Tax authorities
20o/o
do not recognize the separate equity options
lnvestment property:
Purchase date...
Purchase price of investment property
Fair value as at 3.1 December 20x0. . .
Fair value as
Basis
at 31 December 20x1 ...
of measurement
Income tax rate
Capital gains tax rate
15 July 20x0
0,000,000
s
1
s
1
2,000,000
s
1
4,000,000
Fair value model
2oo/o
lOo/o
Holding ossumptions:
(1) Maintains rebuttable presumption that fair value is recovered through sale.
(2) Does not maintain rebuttable presumption. Fair value is recovered through rental income.
ACCOUNTING FOR TAXES ON
FVOCI investment:
Purchase date ..
Purchase price of FVOCI equity investments
Fair value as at 31 December 20x0 ..
Fair value as at 3.1 December 20x1 . .
lncome tax rate
INCOME 987
23 July 20x0
51
2,000,000
s 16,000,000
51
4,000,000
20o/o
Tax scenorios:
(1) Not taxable
during year of fair value gain or loss
(3) Taxed during year of sale
(2) Taxed
Required:
Prepare journal entries to record the deferred tax liability and/or current tax liability during 20x0 and 20xl
fbr each of the above three instruments under each holding assumption or tax scenario, where applicable.