Tutorial Week 3 Homework

Chapter 6: Accounting for income tax

REVIEW QUESTIONS
1.

Outline the different treatments for accounting and tax purposes of the
following items:
(a) depreciation of non-current assets
(b) goodwill
(c) long-service leave payable
(d) allowance for doubtful debts
(e) entertainment costs
(f) prepaid insurance
(g) warranties liability
(h) rent received in advance.

(a) The accounting treatment for depreciation as per AASB 116 is to allocate the
depreciable amount of the asset on a systematic basis over the assets useful life.
The tax treatment is based on a set of rates provided by the tax office which is
usually different to the accounting depreciation rates.
(b) Purchased goodwill is for accounting purposes recognised and then tested for
impairment. For tax purposes, write-downs of goodwill are not allowed as a
deduction. Note AASB 112 provides an exclusion in this regard to temporary
differences. (See 6.4.3 of text).
(c) Long service leave is an accounting expense that is recognised as it is incurred,
however, for tax purposes it is only recognised as an allowable deduction when
the leave is actually taken by an employee and paid in cash.
(d) Doubtful/bad debts are recognised as an accounting expense when the likelihood
of recovering a debt is doubtful, whereas for tax purposes the deduction will only
be allowed when the debt is written out of the accounting records as bad.
(e) Entertainment expenses are an accounting expense, but for tax purposes are not an
allowable deduction.
(f) Prepaid insurance is recognised as an asset for accounting purposes and then
charged to expense over time. The tax treatment is to record the amount prepaid
as an allowable deduction immediately.
(g) Warranty expenses are recognised on the sale of the inventory for accounting
purposes, whereas for tax purposes the deduction is not allowed until the
inventory has been returned to be fixed and a warranty cost has been incurred.
(h) Rent received in advance is regarded as a liability for accounting purposes and
then recorded as income (revenue) over time. The common tax treatment is to
record the amount received in advance as taxable income immediately.
1

Tutorial Week 3 Homework

PRACTICE QUESTIONS

QUESTION 6.14
BARTLE FRERE LTD
A.
Taxable Income
for year ended 30 June 2014
Accounting profit before tax
Add
Bad debts expense
Depreciation expense plant
Long service leave
Annual leave
Office supplies used
Entertainment
Depreciation buildings
Rent received in advance

$600 000
60 000
50 000
45 000
30 000
15 000
18 000
8 000
35 000
861 000

Deduct
Rent revenue
Government grant received
Depreciation expense of plant for tax
Bad debts written off
Long service leave paid
Annual leave paid
Office supplies paid for

30 000
10 000
75 000
45 000
30 000
20 000
18 000
228 000
633 000
$189 900

Taxable income
Current tax liability = 30% x $633 000

The appropriate journal entry is:

Income Tax Expense
Current Tax Liability

Dr
Cr

189 900
189 900

Tutorial Week 3 Homework

Workings:
Allowance for Doubtful Debts
45 000
Beginning balance
55 000
Expense
100 000

40 000
60 000
100 000

Revenue
Ending balance

Rent Received in Advance

30 000
Beginning balance
25 000
Cash
55 000

20 000
35 000
55 000

Cash
Ending balance

Long Service Leave Payable

30 000
Beginning balance
60 000
Expense
90 000

45 000
45 000
90 000

Cash
Ending balance

Annual Leave Payable

20 000
Beginning balance
40 000
Expense
60 000

30 000
30 000
60 000

Accs Receivable
Ending balance

Plant for taxation purposes:

Carrying amount at 1 July 2013
Depreciation
Tax base at 30 June 2014

($500 000 315 000)

$185 000
(75 000)
110 000

Tutorial Week 3 Homework

B.

Carrying
Amount
$
Assets
Cash
Inventory
Receivables
Supplies
Plant
Buildings
Goodwill
Liabilities
A/cs payable
LSL payable
Annual leave
payable
Rent in adv
Total
temporary
differences
Excluded
differences
Net
temporary
differences
Deferred tax
liability
Deferred tax
asset
Beginning
balances
Movement
during year
Adjustment

BARTLE FRERE LTD

Calculation of deferred tax
as at 30 June 2014
Taxable Deductble Tax Base
Amount
Amount
$

Taxable
Temp Diffs

Deductible
Temp
Diffs
$

80 000
170 000
445 000
25 000
240 000
152 000
70 000

(170 000)
(0)
(25 000)
(240 000)
(152 000)
(70 000)

170 000
55 000
0
110 000
0
0

80 000
170 000
500 000
0
110 000
0
0

55 000

290 000
60 000
40 000

0
0

(60 000)
(40 000)

290 000
0
0

60 000
40 000

25 000

(25 000)

25 000

25 000
130 000
152 000
70 000

377 000

180 000

222 000
155 000

180 000

46 500
54 000
(38 100)

(40 500)
-

8 400Cr

13 500 Dr

The journal entry required for the year ended 30 June 2014 would be:
Deferred Tax Asset
Deferred Tax Liability
Income Tax Exp/Income

Dr
Cr
Cr

13 500
8 400
5 100

Tutorial Week 3 Homework

C.
As a result of a change in the tax rate, the company would need to restate the
beginning balances of the deferred tax asset and liability as follows:
Deferred Tax Asset
Deferred Tax Liability
Income Tax Exp/Income
*$40 500 x 5/30
**$38 100 x 5/30

Dr
Cr
Cr

*6 750
**6 350
400

The current tax liability would now be recorded by the following entry (assuming that
the entry had not been made previously)
Income Tax Expense
Current Tax Liability
$633 000 x 35%

Dr
Cr

221 550
221 550

The entry from the second worksheet would now appear as follows, as the change in
tax rate appears as a movement at the bottom of the worksheet:
155 000

Net
temporary
differences
Deferred tax
liability
(35%)
Deferred tax
asset (35%)
Beginning
balances
Movement
during year
Adjustment

Deferred Tax Asset

Deferred Tax Liability
Income Tax Exp/Income

180 000

54 250

63 000

Dr
Cr
Cr

(38 100)

(40 500)

(6 350)

(6 750)

9 800Cr

15 750 Dr

15 750
9 800
5 950