Additional information Allan Ltd owns two depreciable assets, an item of plant that cost $200000 and on which 2 years depreciation has been charged, and furniture that had been purchased for $10000 and on which 6 years depreciation has been charged. The ATO allows a depreciation rate of 25% straight-line on cost to be used, and Allan Lid applies a straight-line rate of 10% on cost in its accounting records. No employee has been paid long-service leave in the current year. The corporate tax rate is 30%. Required Determine the taxable income of Allan Ltd for 30 June 2017 and prepare the journal entry for current tax. Solution Figure 6.10 shows the current tax worksheet of Allan Ltd for 30 June 2017. ALLAN LTD Current Tax Worksheet for the year ended 30 June 2017 Profit before tax (accounting profit) Add: Entertainment expenses Depreciation expense-plant Depreciation expense - furniture Lang-service leave expense Deduct Tax depreciation - plant Taxable income Tax on taxable income @30% Figure 6.10 Current tax worksheet of Allan Ltd $150000 $10000 20000 1000 4000 35 000 50000 (50000) $135.000 $ 40500 In accordance with its tax on taxable income, Allan Ltd recognises current tax for the year ended 30 June 2017 by journal entry as follows: 30/6/17 Income Tax Expense Dr 40500 Current Tax Liability Cr 40500 (Recognition of current tax liability, based on the taxable income for the year) The current tax worksheet shown in figure 6.10 includes the following adjustments or recon- ciling items. 1. Revenues or gains that are not equal to assessable incomes in the period Not applicable. subtract 2. Expenses or losses that are not equal to deductions in the period-add back The relevant items are as follows: Entertainment Expense, Long-service Leave Expense. Depreciation Expense - Plant, and Depreciation Expense - Furniture. 3. Assessable incomes that are not equal to revenues or gains in the period - add in Not applicable. 4. Deductions that are not equal to expenses or losses in the period - subtract The relevant item is Tax Depreciation - Plant, which is calculated to be $50000 (i.e. Cost of $200 000 x tax depreciation rate of 25%). It should be noted that there is no tax depreciation on the furniture because it is 6 years old, which means that it is fully depreciated at the begin- ning of the year for tax purposes based on the accelerated rate of 25%. The current tax worksheet of Allan Ltd highlights that accounting expenses and tax deduc- tions are the most common source of differences between accounting profit and taxable profit. In the solution the relevant accounting expenses are first added back and then the tax deductions allowed are subtracted.