The current system for paying company tax was introduced by the Australian Government on 1 July 2000 as part of its legislation introducing the goods and services tax (GST). The effect of this system for most companies is that income tax is paid, under the PAYG (pay as you go) system, in regular quarterly installments, thereby smoothing out the cash flow requirements for tax payments throughout the year. Basic details for determining tax payments by companies are available on the Australian Taxation Office (ATO) website at www.ato.gov.au. Assume that Chelsey Ltd, for the year ended 30 June 2017, pays quarterly PAYG tax installments as follows:

$8000 on 28 July 2016 (final payment for 30 June 2016)

$4000 on 28 October 2016 (1st payment for 30 June 2017)

$11 000 on 28 February 2017 (2nd payment for 30th June 2017)

$12 000 on 28 April 2017 (3rd payment for 30 June 2017)

Chelsey Ltd determines its annual tax for the year to 30 June 2017 is to be $33 000 on an estimated taxable income of $110 000. An increase to the deferred tax liability and deferred tax asset of $3000 and $6600 was also recognized. As a result of determining the annual tax to be an amount of $33 000, the company pays a final tax payment for the year on 28 July 2017 as follows:

Final tax installment = $33 000 –$4000 –$11 000 –$12 000 = $6000

On 1 October 2017, the ATO notified Chelsey Ltd that its taxable income for the year ended 30 June 2017 was assessed as $115 000, requiring a total tax payment for that year of $34 500. This difference was due to the ATO disallowing:

• A depreciation claim of $3000 made by the company at a depreciation rate higher than that used in the accounting records

• A claim for entertainment expenses of $2000.

In other words, the under provision for tax of $1500 ($34 500 ? $33 000) was caused by an expected temporary difference between accounting depreciation and tax depreciation ($3000) that did not eventuate, and a disallowed deduction of $2000. Hence, an entry must be made, in respect of the depreciation, to reduce the deferred tax liability established at the end of the reporting period (30 June 2017) by $900 to take into account the taxable temporary difference that did not arise, and to recognize an additional expense of $600 to record the additional income tax payable. Chelsey Ltd paid the additional tax on 20 October 2017.

Required

Prepare the journal entries to record all payments of tax and the adjustments from the under provision for tax of Chelsey Ltd in respect of the year ended 30 June 2017.

Answer rating: 100% (QA)

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