ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

CHAPTER 6
REVIEW QUESTIONS

ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

PRACTICE QUESTIONS
RQ2
In accrual accounting, an expense that arises from the recognition of a liability must be measured
by reference to what the expected cash flow will be on settlement of the liability. Rent expense
that arises from rent payable is ultimately paid in cash. Similarly, income tax expense should
reflect income taxes to be paid in cash whether for the current period or in a future period. Prima
facie income tax calculated as accounting profit multiplied by the corporate tax rate does not
connect with the income tax that a company expects to pay because income tax is levied on
taxable profit not accounting profit.
The main principles of accounting for income tax consider not only the current tax
consequences, but place special emphasis on the future tax consequences arising as a result of
differences between the carrying amounts of an entitys assets and liabilities determined under
accounting standards and the tax bases of those assets and liabilities determined under income
tax legislation.

RQ3
In accordance with paragraph 27 of AASB 101 Presentation of Financial Statements, the
financial statements other than the statement of cash flows must be prepared using the accrual
basis of accounting. In contrast, taxable profit uses a partial accrual model because some items
must be recognised on a cash basis.
Long service leave is accrued for accounting purposes resulting in the provision for employee
benefits, 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.
Doubtful debts are accrued as an accounting expense resulting in the contra-asset Allowance for
Doubtful Debts. In contrast, the deduction is only allowed for tax purposes when the debt is
written off accounts receivable as bad indicating that the cash from the customer is not going to
be collected.
Prepaid insurance is recognised as an asset for accounting purposes and then charged to expense
over time as the benefits of the asset are consumed. The tax treatment is to record the amount
prepaid as an allowable deduction immediately (at the time of payment).
Warranty expenses are recognised on the sale of goods for accounting purposes resulting in the
provision for warranty, whereas for tax purposes the deduction is not allowed until the goods are
fixed under warranty and the entity has effectively paid for the warranty.
Interest expense is accrued for accounting purposes resulting in Interest Payable however, for tax
purposes only interest paid is deductible.
Development costs may be recognised as an asset for accounting purposes and then expensed as
the benefits are consumed. In contrast, development costs are allowed as a deduction for tax
purposes when paid.
Rent received in advance is regarded as the liability Unearned Revenue for accounting purposes
and then recorded as income (revenue) over time as the service is provided. The common tax
treatment is to record the amount received in advance as taxable income immediately.

ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

RQ17
Income tax losses can provide a future tax benefit because the losses can be carried forward and utilised
to reduce the taxable income of a future period.
Paragraph 34 of AASB 112 sets out the recognition criteria in relation to raising a deferred tax asset from
tax losses. A deferred tax asset is recognised for tax losses if it is probable that future taxable profit will
be available against which the carried forward losses can be utilised. The recognition of tax losses as a
deferred tax asset is consistent with the recognition of deductible temporary differences as deferred tax
assets.
Paragraph 36 of AASB 112 requires close consideration of whether future taxable profits will be available
for tax losses and points to the following factors:
taxable temporary differences that result in taxable amounts in the future
the expiry date for tax losses, if any
whether the cause of the tax losses is likely to reoccur
tax planning opportunities
Exempt income earned in the current year reduces the amount of that years tax loss. That is, where an
entity has a tax loss of say $15 000 and the entity earned $3 000 in exempt income in that year, then the
tax loss that can be carried forward to later years is reduced to $12 000. In the case of recovering a tax
loss from a previous year, the entity must first of all reduce the carry forward tax loss by the amount of
exempt income earned in the current period. This situation results in the ATO collecting additional tax
from the entity because of the exempt income. For example, assume that an entity has a carry forward tax
loss of $18 000, exempt income for the current period is $5 000 and the current years taxable income is
$25 000. Instead of reducing the taxable income down by $18 000 to $7 000, the entity must first reduce
the carry forward tax loss by the $5 000 exempt income. This will now result in the entitys taxable
income being reduced down by only $13 000, being ($18 000 - $5 000) to $12 000. Thus the ATO will
collect an additional ($5 000 x Tax Rate) because of the exempt income.

PQ6.2
Case 1
Current Tax Worksheet
$
Profit before income tax
Add:
Goodwill impairment loss
Donation to political party
Depreciation expense
Long service leave expense

$
40 000
6 000
1 000
4 000
600

Deduct:
Long service leave paid
Tax depreciation
Taxable income
Current tax liability @ 30%

8 000

The journal entry is:

Income Tax Expense
Current Tax Liability

Dr
Cr

11 600
51 600

(8 000)
43 600
$13 080

13 080
13 080

ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

Case 2
Current Tax Worksheet
$
Profit before income tax
Add:
Entertainment costs
Donation to political party
Depreciation expense
Long service leave expense

$
20 000
6 000
3 000
2 000
600

Deduct:
Long service leave paid
Tax depreciation
Taxable income
Current tax liability @ 30%

11 600
31 600

4 000

The journal entry is:

Income Tax Expense
Current Tax Liability

Dr
Cr

(4 000)
27 600
$8 280

8 280
8 280

Case 3
Current Tax Worksheet
$
Profit before income tax
Add:
Entertainment costs
Depreciation expense
Long service leave expense

$
5 000
7 000
10 000
600

Deduct:
Long service leave paid
Tax depreciation
Taxable income
Current tax liability @ 30%

17 600
22 600

20 000

The journal entry is:

Income Tax Expense
Current Tax Liability

Dr
Cr

(20 000)
2 600
$ 780

780
780

ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

Case 4
Current Tax Worksheet
$
Loss before income tax
Add:
Goodwill impairment loss
Depreciation expense
Long service leave expense

$
(10 000)
8 000
2 000
1 200

Deduct:
Long service leave paid
Tax depreciation
Tax loss
Current tax liability @ 30%

2 400
4 000

Assuming that recognition criteria for a tax loss are satisfied, the journal entry is:
Deferred Tax Asset
Dr
1 560
Income Tax Income
Cr

11 200
1 200

(6 400)
(5 200)
$0

1 560

PQ6.3 (part A)
Current Tax Worksheet for year ended 30 June 2017
Profit before income tax
Add:
Doubtful debts expense
3 000
Depreciation expense - plant
7 000
Long service leave expense
4 000
Deduct:
Bad debts written off
2 000
Tax depreciation - plant
8 000
Tax loss
Current tax liability @ 30%

$ 80 000

14 000

(10 000)
84 000
$25 200

ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

PQ6.13 (part A & B)

THATS ALL RIGHT LTD
Determination of Taxable Income for the year ended 30 June 2017
Accounting profit before income tax
22 240
Add: Accounting expense
Carrying amount of plant sold
20 000
Impairment of goodwill (non-deductible)
11 100
Doubtful debts expense
8 100
Depreciation plant
14 000
Insurance expense
12 900
Annual leave expense
14 500
80 600
Deduct: Allowable deductions
Carrying amount of plant sold (tax)
Bad debts written off
Depreciation of plant for tax
Insurance paid
Annual leave paid

15 000
6 500
20 250
10 700
11 000

Deduct: Accounting income

Grant revenue (exempt)
Taxable income
Add back exempt income

(63 450)

(5 000)
34 390
5 000
39 390
(16 900)
22 490
$6 747

Tax losses recouped

Taxable income
Current tax liability @ 30%
Journal entry to record current tax:
Income Tax Expense
Current Tax Liability
(Recognition of current tax liability)

$6,747
$6,747

Income Tax Expense

Deferred tax asset
(Recovery of previous periods tax loss)

$5,070
$5,070

ACW2491 Company Reporting

Tutorial Solution
Semester 1 2016
Topic 3: Accounting for Income Tax: Current Issues

PQ6.14 (part A)
Current Tax Worksheet for the year ended 30 June 2017
Accounting profit before tax
Add
Entertainment expenses
Depreciation expense buildings
Bad debts expense
Depreciation expense plant
Long service leave expense
Annual leave expense
Office supplies expense
Rent received

600 000
18 000
8 000
60 000
50 000
45 000
30 000
15 000
35 000
261 000

Deduct
Rent revenue
Government grant received
Tax depreciation
Bad debts written off
Long service leave and Annual leave paid
Office supplies paid for

30 000
10 000
75 000
45 000
50 000
18 000
(228 000)
633 000
189 900

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