Question 1: Mount Everest Ltd purchased a machine on 1 July 2018 at a cost of $2560,000. The machine is expected to have a useful life of 10 years (straight line basis) and no residual value. For taxation purposes, the ATO allows the company to depreciate the asset over 8 years. The profit before tax for the company for the year ending 30 June 2019 is $2400, 000. To calculate this profit the company has deducted $240,000 entertainment expense, and $320,000 salary expense that has not yet been paid. Also the company has included $280,000 interest as income that the company has not yet received. The Company satisfies both conditions under AASB 112 for off-setting deferred tax assets and deferred tax liability and reporting the net amount. The tax rate is 30%. Required: (i) Calculate the companys taxable profit and hence its tax payable for 2019. (ii) Determine the deferred tax liability and/or deferred tax asset that will result. (iii) Prepare the necessary journal entries at 30 June 2019. Answer: (i) Accounting profit 30 June 2019 $ 2400,000 add: Depreciation allowed for accounting purposes 256,000 less: Depreciation allowed for tax purposes (320,000) add: Entertainment expenditure 240,000 add: Accrued salary expense 320,000 less: accrued interest income (280,000) Taxable profit of $ 2,616,000 Thus Tax payable is 30% $784,800 (ii) Tax base of assets and Liabilities as at 30 June 2019 For machine For accounting purposes = 2560,000- 256,000 = $ 2304,000 For tax purposes = 2560,000 320,000 = $ 2240,000 $ 64,000 For assets, carrying amount > tax base, Thus a deferred tax liability of 30% x 64,000 = $19200 For entertainment expenditure There is no difference between the carrying value and the tax base of entertainment expenditure payable (240,000 - 240,000 = 0), hence there will be no deferred tax asset or deferred tax liability difference recognised. For accrued salary expense Carrying value of liability $320000 Tax base 0 Deductible temporary difference $320000 Deferred tax assets created for accrued salary expense = $320000*.30 = $96000 For accrued interest income Carrying value of asset $280000 Tax base 0 Taxable temporary difference $280000 Deferred tax liability created for accrued interest income =$280000*.30 = $84000 (iii) Journal entry for 30 June 2017 DR Income tax expense $784800 CR Tax payable $784800 DR Deferred tax asset $96000 CR Income tax expense $96000 DR Income tax expense $103200 (19200+84000) CR Deferred tax liability $103200 To offset the DTA and DTL in accordance to AASB112, DR DTL $96,000 CR DTA $96,000 Question 2: Data for Allan Ltd for the year to 30 June 2017 are as follows: Accounting profit before tax $150,000 Depreciation - plant 20,000 Depreciation - furniture 1,000 Entertainment expenses 10,000 Long-service leave expense 4,000 Plant cost (2 years ago) 200,000 Furniture cost (6 years ago) 10,000 The ATO allows a depreciation rate of 25% straight-line on cost to be used Allan Ltd 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. Answer: Journal entry: 30/6/17 Income Tax Expense Dr 40,500 Current Tax Liability Cr 40,500 (Recognition of current tax liability, based on the taxable income for the year) Question 3 What is a temporary difference and why does it arise? Where the carrying amount of an asset or liability (the carrying amount is determined using accounting rules) is different to the tax base (which is determined by applying taxation rules) then a temporary difference can arise. Paragraph 5 of AASB 112 defines a temporary difference as: The difference between the carrying amount of an asset or a liability in the statement of financial position and its tax base. AASB 112 explains that temporary differences may be either: (a) deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or (b) taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Something that will lead to an increase in taxable income in future years (a taxable temporary difference) creates a liabilitya deferred tax liability. Something that will lead to a decrease in taxable income in future years (a deductible temporary difference) creates an asseta deferred tax asset.