Suggested Answers
Question 1
Berry Bhd reported Profit before tax of $7,900,000. The following information is provided for
computation of taxable income:
(a) Book depreciation in excess of tax depreciation, $450,000
(b) Excess of income on installment sales over income reportable for tax purposes, $450,000
(c) Premium payment for life insurance policy on CEO, $200,000 non-deductible
(d) Rent collected in advance of period earned, $285,000
(e) Warranty provision accrued in advance of period paid, $80,000
(f) Interest revenue received on government bonds, $150,000, non-taxable
(g) Bad debts expense in excess of bad debts written off, $40,000
(h) Current tax rate is 25%
Required:
1. Which of the above items are temporary and which are permanent differences?
2. Determine the current tax payable for Berry Bhd.
3. Compute Deferred Tax Asset/Liability (Note: for item(a), assume the temporary difference is
also $450,000)
Answer:
(1) Temporary difference = item (a) (b) (d) (e) (g)
Permanent difference = (c) and (f)
(2) Worksheet: Computation of Current Tax liability/payables
PBT
+ Book depreciation
- Tax depreciation
- Sales revenue
+ Cash received from customers
+ CEO life insurance (non-deductible
– Rent revenue
+ Rent received
+Warranty expense
– Warranty paid
– Interest revenue from Govt bond (non-taxable)
+ Bad debts expense
– Bad debts written off
Taxable Income
Tax rate
Current Tax Liability/Payables
7,900,000
450,000
0
(450,000)
0
200,000
(285,000)
0
80,000
0
(150,000)
40,000
0
7,785,000
*25%
1,946,250
Worksheet: Computation of Deferred Tax Asset/liability (DTA/DTL)
Item
(Tax rate=
25%)
(a) Assume TD
is 450,000
(b)
(e)
(g)
Total
Carrying
amount
(Accounting)
450,000
80,000
40,000
Tax base
(Tax carrying
amount)
0
0
0
Temporary
Difference
(TD)
450,000 (D)
450,000 (T)
80,000 (D)
40,000 (D)
DTA
DTL
112,500
112,500
20,000
10,000
142,500
112,500
DTA= 142,500-112,500 = 30,000
Journal entries:
Dr Tax Expense 1,916,250
Dr DTA
30,000
Cr Current Tax Liability
1,946,250
Question 2
Celery Ltd reported the following for 2016 and 2017 (RM in millions):
2016
2017
(RM in millions)
1800
1600
200
(RM in millions)
2100
1800
300
Revenue
Expenses
Profit before tax (Income Statement)
Tax rate: 25%
(a) Expenses each year includes $50 million from a two year casualty insurance policy purchased in
2016 for $100 million.
(b) Expenses include $5 million non-deductible insurance premium each year for life insurance on
key executives.
(c) Celery Ltd sells one-year subscriptions to a weekly journal. Subscription sales collected and
taxable in 2016 and 2017 were $65 million and $80 million respectively. Subscriptions included
in 2016 and 2017 financial reporting revenues were $45 million ($20 million collected in 2015
but not earned until 2016) and $60 million respectively.
(d) 2016 expenses included a $25 million unrealized loss from reducing investments (classified as
trading securities). The investments were sold in 2017 at a loss of $20 million. Gains or losses
are reported in the tax return in the year when the securities are sold.
(e) During 2015, accounting income included an estimated loss of $15 million from having accrued a
loss provision. The loss was paid in 2016 at which time it is tax deductible.
Required:
1. Which of the five differences described are temporary and which are permanent differences?
Why?
2. Prepare a schedule that reconciles the differences between profit before tax and taxable income
for 2016 and 2017.
3. Prepare the appropriate journal entry to record current tax liability.
Answer:
1. Permanent difference = (b), the rest are temporary difference
2.
Year
Profit before tax
- Insurance paid
+ Insurance expense
+ non-deductible insurance premium
-Sales revenue
+ Revenue received
Unrealized loss (trading securities)
Realized loss (Trading securities)
Loss provision paid
Taxable income
2016
(million)
200
(100)
50
5
(45)
65
25
0
(15)
185
2017
(Million)
300
0
50
5
(60)
80
(20)
355
3. year 2016: 185 x 25% = 46.25
year 2017: 355 x 25% = 88.75
2016
2017
(million)
46.25
Income tax expense
Current tax payable
(Million)
46.25
Income tax expense
Current tax payable
88.75
88.75
Worksheet: Computation of Deferred Tax Asset/liability (DTA/DTL) for 2016
Item
(Tax rate= 25%)
(a) prepaid insurance
(c) Unearned revenue
(d) FA at FVTPL
(e) Loss provision
Total
Carrying
amount
(Accounting)
50m
20m
25m
15m
Tax base
(Tax carrying
amount)
0
0
0
0
Temporary
Difference (TD)
50m (T)
20m (D)
25m (D)
15m
DTA
DTL
12.5m
5m
6.25m
3.75m
15m
12.5m
DTA= 15m-12.5m = 2.5m
Question 3
The accounting records of November Inc. show the following data for 2018.
1. Equipment was acquired in early January for $400,000. Straight-line depreciation over a 8-year
life is used, with no residual value. For tax purposes, a 20% rate is used to calculate capital
allowance.
2. Product warranties were estimated to be $50,000 in 2018. Actual repair and labour costs related
to the warranties in 2018 were $10,000. The remainder is to be paid evenly in 2019 and 2020.
3. Sales on accrual basis were $100,000. For tax purposes, $75,000 was recorded on the
installment-sale method.
4. Fines incurred for pollution violations were $5000.
5. Entertainment expenses were $15,000, non-deductible for tax purposes.
6. Rent collected in advance on Jan 1, 2018, totaled RM60,000 for a 3-year period.
7. Profit before tax was $75,000, the tax rate is 25%.
Required:
Prepare a schedule starting with Profit before tax in 2018 and ending with Taxable income in 2018
Prepare the journal entry for 2018 to record income tax payable.
Workings:
Accounting depreciation = 400000/8 = 50000 p.a.
Tax depreciation = 400000 *20% = 80,000 p.a
Answer:
(75,000 +50,000 -80,000 + 50,000 – 10000 -100,000 +75,000 +5,000 + 15,000 +60,000 -20,000) *25%