Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.1

a.

A taxable temporary difference arises when

a) The tax base of an asset exceeds its carrying amount

b) The carrying amount of an asset exceeds its tax base
c) Economic benefits flow from the entity in the form of tax payments in the current period

b.

A deductible temporary difference arises when

1. The tax base of an asset exceeds its carrying amount

2. The carrying amount of an asset exceeds its tax base
3. The cost of the asset is deductible against future economic benefits

a) 1 and 3
b) 1 only
c) 2 only
d) 2 and 3
e) 3 only

c.

A machine is purchased on 1 April 20X0 at a cost of £1 000. For the year ending 31 March 20X1, the
depreciation expense amounts to £200 and tax allowances amount to £300. The tax rate is 28%.

The temporary difference and deferred tax implications are:

a) Deductible temporary difference of £100 and a deferred tax liability of £28

b) Taxable temporary difference of £100 and a deferred tax liability of £28
c) Deductible temporary difference of £700 and a deferred tax asset of £196
d) Taxable temporary difference of £100 and a deferred tax asset of £28
e) Taxable temporary difference of £800 and a deferred tax liability of £224

d.

At the end of the current year, an entity has accrued expenses with a carrying amount of £1 000. The
accrued expenses are deductible when incurred.
The tax rate is 28%.

The tax base of the accrued expenses, the temporary difference and the deferred tax at the end of the
current year amount to:

a) Tax base is £0. Deductible temporary difference of £1 000. Deferred tax asset of £280.
b) Tax base is £0. No temporary difference. No deferred tax.
c) Tax base is £0. Taxable temporary difference of £1 000. Deferred tax liability of £280.
d) Tax base is £1 000. No temporary difference. No deferred tax.
e) Tax base is £1 000. Taxable temporary difference of £1 000. Deferred tax liability of £280.

Accounting expense and tax deduction.

The tax base of a liability = CA – amount deductible in future
= 1000 – 0 = 1 000

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Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.1 continued . . .

e.

At the end of the current year, an entity has borrowings with a carrying amount of £1 000. There are
no tax consequences when the loan is repaid.
The tax rate is 28%.

The tax base of the loan, the temporary difference and the deferred tax at the end of the current year
amount to:

a) Tax base is £0. Deductible temporary difference of £1 000. Deferred tax asset of £280.
b) Tax base is £0. No temporary difference. No deferred tax.
c) Tax base is £0. Taxable temporary difference of £1 000. Deferred tax liability of £280.
d) Tax base is £1 000. No temporary difference. No deferred tax.
e) Tax base is £1 000. Taxable temporary difference of £1 000. Deferred tax liability of £280.

No accounting income and no taxable profit.

The tax base of a liability = CA – amount deductible in future
= 1000 – 0 = 1 000

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 2

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.2

a) Deferred tax computation

Carrying Tax Temporary Deferred

amount base difference tax (30%)
C C C C
Asset-cost 300 300 0 0
Accumulated depreciation / 6
Tax allowance 100 80 20
20
200 220 6 (A)
(Deductible)

b) Deferred tax journal

Dr Deferred tax: income tax (A) 6

Cr Income tax expense (P/L) 6

c) Current tax computation

x 0.30
Profit before taxation 1 000
Permanent differences 0
1 000
Temporary differences -
+ Depreciation 100
- Tax allowance (80)
Taxable profit 1 020 306 Dr TE Cr CTP

d) Current tax journal

Dr Income tax expense (P/L) 306

Cr Current tax payable: income tax (L) 306

e) SOCI

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20X4
C
Profit before taxation 1 000
Income tax expense (306 - 6) (300)
700

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Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.3

a) Deferred tax computation

CA TB TD DT (28%)
Cost 200 000 200 000 0 0
Depreciation/ tax deduction (40 000) (50 000) 10 000 2 800 Dr TE Cr DT
Carrying amount 160 000 150 000 10 000 2 800 L

b) Current tax computation

20X6 X 28%
C
Accounting profit 800 000
Permanent difference
- Exempt dividend income (60 000)
740 000
Temporary difference
+ Depreciation 40 000
- Tax deduction (50 000)
Taxable profit 730 000 204 400 Dr TE Cr CTP

c) Statement of comprehensive income

STEM LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X6
C
Profit before tax 800 000
Income tax expense (204 400 + 2 800 -10 000) (197 200)
Profit for period 602 800

d) Notes

STEM LIMITED
NOTES TO THE FIANNCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X6
C
Taxation
Current tax 204 400
Deferred tax 2 800
Over-provision in prior year (180 000 – 170 000) (10 000)
Income tax expense per statement of comprehensive 197 200
income

Tax rate reconciliation C %

Tax on accounting profit / applicable rate (800 x 0,28) 224 000 28,0
Exempt dividend income [(60 x 0,28)] / 800 (16 800) (2,1)
Over provision in prior year (10 / 800) (10 000) (1,25)
Tax expense / effective rate 197 200 24.65

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 4

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.4

a) Calculations

Current income tax calculation

x 30%
Accounting profit 100 000
- capital profits (exempt income) (50 000)
+ taxable capital gain 40 000
+ donations (non-deductible expenses) 30 000
Taxable accounting profits 120 000
Temporary differences:
- expenses prepaid closing balance (40 000)
Taxable profit 80 000 24 000 Dr TE Cr CTP

Taxable capital gain calculation

Proceeds 300 000

Base cost (250 000)
Capital gain 50 000
Taxable capital gain 50 000 x 80% 40 000

Deferred taxation calculation

Carrying Tax Temporary Deferred Balance/

amount base difference tax adjustment
Expenses prepaid
Balance: 1 March 20X0 0 0 0 0
Adjustment (12 000) Dr TE; Cr DTL (2)
Balance: 28 February 20X1 40 000 0 (40 000) (12 000) L (4)

b) Journals

JOURNAL
Debit Credit
Income tax expense (P/L) 24 000
Current tax payable: income tax (L) 24 000
Current income taxation estimated for 20X1
Income tax expense (P/L) 12 000
Deferred taxation: income tax (L) 12 000
Deferred income taxation estimated for 20X1

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Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.4 continued…

c) Ledger-accounts

Income tax expense (E) Current tax payable: income tax (L)
Description C Description C Description C Description C
Current tax 24 000 Income tax 24 000
payable (1) (1)

Deferred tax 12 000

(2)

Profit & 36 000 Balance c/d 24 000

Loss (3)
36 000 36 000 24 000 24 000
Balance b/d 24 000

Deferred tax: income tax (L)

Description C Description C
Taxation (2) 12 000

Balance c/d 12 000

12 000 12 000
(4) 12 000
Balance b/d

d) Statement of comprehensive income disclosure

LOOK LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED 28 FEBRUARY 20X1
Note 20X1
C
Profit before tax 100 000
Income tax expense 3 (36 000)
Profit for the year 64 000
Other comprehensive income for the year -
Total comprehensive income for the year 64 000

f) Statement of financial position disclosure

LOOK LIMITED
EXTRACTS FROM STATEMENT OF FINANCIAL POSITION
AT 28 FEBRUARY 20X1
Note 20X1
EQUITY AND LIABILITIES C
Non-current liabilities
Deferred tax 12 000
Current liabilities
Current tax payable 24 000

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Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.4 continued…

f) Income tax expense note disclosure

LOOK LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED 28 FEBRUARY 20X1
20X1
C
3. Income tax expense
Current tax 24 000
Deferred tax 12 000
Income tax expense per statement of comprehensive income 36 000

Tax rate reconciliation: % C

Tax effects of:
Profit before tax / applicable rate (100 000 x 30%) 30 30 000
Non-taxable portion of capital gain (50 000 x 20% x 30%) (3) (3 000)
Non-deductible expenses (30 000 x 30%) 9 9 000
Income tax expense / effective rate 36 36 000

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 7

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.5

Part A

Journal entry

Debit Credit
28 February 20X5
Income tax expense (P/L) W1 600
Deferred taxation: income tax (L) 600
Deferred income tax adjustment for 20X5

Workings

W1 Calculation of deferred taxation (balance sheet approach)

Carrying Tax Temporary Deferred

amount base difference tax
Property, plant & equipment:
Balance – 28/02/20X4 145 000 115 000 (30 000) (9 000) L
Movement (25 000) (30 000) (5 000) (1 500) Cr DT; Dr TE
Balance – 28/02/20X5 120 000 85 000 (35 000) (10 500) L

Rent received in advance:

Balance – 28/02/20X4 (2 000) 0 2 000 600 A
Movement (balancing) (3 000) 0 3 000 900 Dr DT; Cr TE
Balance – 28/02/20X5 (5 000) 0 5 000 1 500 A

Interest income receivable:

Balance – 28/02/20X4 0 0 0 0
Movement (balancing) 20 000 20 000 0 0
Balance – 28/02/20X5 20 000 20 000 0 0

Property, Interest
plant and Rent received income
Deferred tax summary equipment in advance receivable Total
Balance – 28/02/20X4 (9 000) 600 0 (8 400) L
Movement (balancing) (1 500) 900 0 (600) Cr DT; Dr TE
Balance – 28/02/20X5 (10 500) 1 500 0 (9 000) L

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 8

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.5 continued . . .

Part B

Plant and equipment

• The carrying amount of the plant and equipment represents the amount that will be recovered in
the form of economic benefits that will flow to the entity in future periods.
• The tax base of the plant and equipment is the amount that will be deductible for tax purposes
against the future taxable economic benefits.
• As the carrying amount of the plant and equipment exceeds its tax base, the amount of the taxable
economic benefits will exceed the amount that will be allowed as a deduction for tax purposes.
This difference is a taxable temporary difference and the obligation to pay the resulting income
taxes in future periods is recognised as a deferred tax liability.

Rent received in advance

• The carrying amount of the rent received in advance represents the obligation to provide services
in future periods.
• The tax base of the rent received in advance is the carrying amount of the liability, less any
amount of the revenue that will not be taxable in future periods. In other words, the tax base
represents the portion of the future economic benefits (past cash receipt) that will be taxable in a
future period.
• As the rent received in advance was not recognised as income for accounting purposes but was
taxed in the current period, the tax base is zero (C5 000 – C5 000) (i.e. no portion of the income
received in advance account will be taxable in the future). This gives rise to a deductible
temporary difference and the tax ‘pre-paid’ is a deferred tax asset.

Interest income receivable

• The carrying amount of the interest income receivable represents the amount that will be
recovered in the form of economic benefits that will flow to the entity in future periods.
• The tax base of interest income receivable is equal to its carrying amount if the economic benefits
will not be taxable in future periods. Since all the interest income is taxed in the current year, no
portion of the amount receivable will be taxed in the future: the tax base is therefore equal to its
carrying amount (carrying amount: 20 000 – portion to be taxed in the future: 0).
• The tax authority taxes income on the earlier of receipt or accrual, and thus the interest income
receivable is taxed in the current year (year of accrual). The accountant recognises income in the
same year (the year of accrual). There is thus no temporary difference and no deferred tax.

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 9

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.6

a) Deferred tax calculation

Deferred tax computation CA TB TD DT

Property, plant and equipment

Balance - 1/1/20X3 355 000 290 000 (65 000) (19 500) DTL

Depreciation/ wear and tear (35 000) (25 000) 10 000 3 000 Dr DT;
Cr TE

Balance - 31/12/20X3 320 000 265 000 (55 000) (16 500) DTL

Year-end accruals
Balance - 1/1/20X3 (15 000) 0 15 000 4 500 DTA
- Revenue received in advance (15 000) 0 15 000 4 500 DTA
- Expenses prepaid 0 0 0 0 -

Movement 900 Dr DT;

Cr TE

Balance - 31/12/20X3 (18 000) 0 18 000 5 400 DTA

- Revenue received in advance (28 000) 0 28 000 8 400 DTA
- Expenses prepaid 10 000 0 (10 000) (3 000) DTL

Total deferred tax balance at Calculations:

- 1/1/20X3 19 500 (L) - 4 500 (A) + 0 (15 000) DTL
- 31/12/20X3 16 500 (L) - 8 400 (A) + 3 000 (L) (11 100) DTL

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 10

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.6 continued …

b) Calculation of current income tax

Current income tax

Profit before tax 300 000
Adjust for non-temporary differences
Less dividend income (5 000)
Taxable accounting profits 295 000
Adjust for movement in temporary differences 13 000
Add depreciation 35 000
Less wear and tear (25 000)
Add revenue received in advance closing balance 28 000
Less revenue received in advance opening balance (15 000)
Less expenses prepaid closing balance (10 000)
Taxable profit 308 000

Current income tax 308 000 x 30% 92 400 Dr TE and Cr CTP

c) Journal entries

Debit Credit
Income tax expense (P/L) 92 400
Current tax payable: income tax (L) 92 400
Current income tax for 20X3

Deferred taxation: income tax (A) 3 900

Income tax expense (P/L) 3 900
Deferred income tax adjustment for 20X3

Note that the income tax expense that will be presented on the face of the statement of comprehensive income
will be C88 500 (C92 400 – C3 900).

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 11

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.6 continued . . .

d) Disclosure

FISH LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X3
20X3 20X2
C C
6. Deferred taxation asset/ (liability)
The deferred tax balance is caused by temporary differences relating to:
Property, plant and equipment (16 500) (19 500)
Expenses prepaid (3 000) 0
Income received in advance 8 400 4 500
(11 100) (15 000)

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 12

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.7

a) Journal entries

Debit Credit
31 December 20X1
Income tax expense (P/L) W1 82 500
Current tax payable: income tax (L) 82 500
Current income tax for 20X1

Deferred taxation: income tax (A) W2 8 700

Income tax expense (P/L) 8 700
Deferred income tax adjustment for 20X1

b) Disclosure

WOOD LIMITED
EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Note 20X1
C
Profit before tax 250 000
Income tax expense) (82 500 – 8 700 4 (73 800)
Profit for the period 176 200
Other comprehensive income 0
Total comprehensive income 176 200

WOOD LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1

4. Income tax expense 20X1

C
Current tax 82 500
Deferred tax (8 700)
Tax expense per statement of comprehensive income 73 800

Tax rate reconciliation: C %

Applicable tax rate (ATR) 30
Tax effects of:
Profits before tax (C250 000 x 30%) 75 000 30
Exempt dividend income (C12 000 x 30%) (3 600) (1.4)
Non-deductible donations (C8 000 x 30%) 2 400 0.9
Tax expense per statement of comprehensive income 73 800 29.5

Effective tax rate (ETR) 29.5%

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 13

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.7 continued . . .

Workings

W1. Calculation of current tax

20X1 X 30%
Profit before tax (given) 250 000
Exempt dividend income (12 000)
Non-deductible donations 8 000
246 000
Temporary differences: 29 000
Income received in advance (closing balance) 24 000
Prepaid expense (closing balance) (10 000)
Depreciation 40 000
Capital allowance (25 000)

Taxable profit 275 000 82 500 (Dr TE Cr CTP)

W2. Calculation of deferred taxation

CA TB TD DT (30%)
Property, plant & equipment:
Balance – 1/1/20X1 ? ? ? ?
Movement (balancing) (40 000) (25 000) 15 000 4 500 Dr DT Cr TE
Balance – 31/12/20X1 ? ? 4 500 Asset

Unearned income:
Balance – 1/1/20X1 0 0 0 0
Movement (balancing) 7 200 Dr DT Cr TE
Balance – 31/12/20X1 (24 000) 0 24 000 7 200 Asset

Prepaid rent expense:

Balance – 1/1/20X1 0 0 0 0
Movement (balancing) (3 000) Cr DT Dr TE
Balance – 31/12/20X1 10 000 0 (10 000) (3 000) Liability

Telephone payable:
Balance – 1/1/20X1 0 0 0 0
Movement (balancing) 0
Balance – 31/12/20X1 (5 000) (5 000) 0 0

Interest income receivable:

Balance – 1/1/20X1 0 0 0 0
Movement (balancing) 0
Balance – 31/12/20X1 7 000 7 000 0 0

Deferred tax summary PPE IRIA EPP Total

Balance – 01/01/20X1 0 0 0 0
Movement (balancing) 4 500 7 200 (3 000) 8 700 Dr DT Cr TE
Balance – 31/12/20X1 4 500 7 200 (3 000) 8 700 Asset

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Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.8

Part A

a) Calculation of deferred tax

PPE: Plant CA TB TD DT (40%)

20X2 Opening balance 0 0 0 0
Plant purchased 500 000 500 000 0 0
Cr DT
Depreciation 20X2 (100 000) (250 000) (150 000) (60 000) Dr TE
20X2 Closing balance 400 000 250 000 (150 000) (60 000) Liability
Cr DT
Depreciation 20X3 (100 000) (150 000) (50 000) (20 000) Dr TE
20X3 Closing balance 300 000 100 000 (200 000) (80 000) Liability
Depreciation 20X4 (100 000) (100 000) 0 0
20X4 Closing balance 200 000 0 (200 000) (80 000) Liability
Dr DT
Depreciation 20X5 (100 000) (0) 100 000 80 000 Cr TE
CA of asset sold (100 000) (0) 100 000

20X5 Closing balance 0 0 0 0

b) Calculation of current tax

20X5 20X4
C C
Profit before tax 150 000 120 000
Temporary differences
+ depreciation 100 000 100 000
- wear and tear 0 (100 000)
- profit on sale (proceeds: 100 000 – CA: 100 000) 0 n/a
+ recoupment (proceeds: 100 000 – TB: 0) 100 000 n/a
Taxable profits 350 000 120 000
Tax rate 40% 40%
Current income tax 140 000 48 000

c) Journal entries

20X5 20X4 20X3 20X2

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
31 December
Income tax expense (P/L) 140 000 48 000 Not required Not required
Current tax payable: income tax (L) (140 000) (48 000)
Recording current tax

Income tax expense (P/L) (80 000) n/a 20 000 60 000

Deferred tax: income tax ( L) 80 000 n/a (20 000) (60 000)
Recording deferred tax

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 15

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.8 continued …

Part A continued…

d) Disclosure

BED LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
Notes 20X5 20X4
C C
Profit before tax 150 000 120 000
Income tax expense (20X5: 140 000 – 80 000) 3 (60 000) (48 000)
Profit for the year 90 000 72 000
Other comprehensive income for the year 0 0
Total comprehensive income for the year 90 000 72 000

BED LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X5
Notes 20X5 20X4
ASSETS C C
Non-current assets
Property, plant and equipment 0 200 000
EQUITY AND LIABILITIES
Non-current liabilities
Deferred taxation 4 0 80 000

BED LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
2. Accounting policies C C

2.1 Deferred taxation

Deferred tax is recognised on differences between carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the
balance sheet method.

3. Income tax expense

Current tax 140 000 48 000
Deferred tax (80 000) 0
Income tax expense per statement of comprehensive income 60 000 48 000

4. Deferred tax asset / (liability)

The deferred tax balance comprises temporary differences relating to:
Property, plant and equipment 0 (80 000)

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 16

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.8 continued …

Part B

a) Calculation of deferred taxation

No change

b) Calculation of current tax

20X5 20X4
C C
Profit before tax 150 000 120 000
- profit on sale Proceeds: 550 000 – CA: 100 000 (450 000) 0
+ taxable capital gain (Proceeds: 550 000 –cost 500 000) x 50% 25 000 0
Temporary differences 600 000 -
+ depreciation 100 000 100 000
- wear and tear 0 (100 000)
+ recoupment Proceeds limited to cost: 500 000 – TB: 0 500 000 N/A
Taxable profit 325 000 120 000
Tax rate 40% 40%
Current income tax 130 000 48 000

Workings supporting the calculation of current income tax above

CA TB
Selling price Given 550 550
Carrying amount/ tax base before the sale Part(a): deferred tax calculation 100 0
450 550
Included in accounting profits / taxable profits (450) (525)
Taxable capital gain (Proceeds: 550 – Cost: 500) x 50% 25
Recoupment Proceeds, limited to cost: 500 – TB: 0 500
Profit on sale Proceeds: 550 – CA 100 450
Profit that is exempt from tax 0 25

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 17

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.8 continued ….

Part B continued . . .

c) Journal entries

20X5 20X4 20X3 20X2

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
31 December
Income tax expense (P/L) 130 000 48 000 Not required Not required
Current tax payable: income tax (L) (130 000) (48 000)
Recording current tax

Income tax expense (P/L) (80 000) N/a 20 000 60 000

Deferred tax: income tax (L) 80 000 N/a (20 000) (60 000)
Recording deferred tax

d) Disclosure

BED LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
Calculations Note 20X5 20X4
C C
Profit before taxation 150 000 120 000
Income tax expense Per the note 3 (50 000) (48 000)
Profit for the year 100 000 72 000
Other comprehensive income for the year - -
Total comprehensive income for the year 100 000 72 000

BED LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X5
Calculations Note 20X5 20X4
ASSETS C C
Non-current assets
Property, plant and equipment Part (a) 0 200 000
EQUITY AND LIABILITIES
Non-current liabilities
Deferred taxation Part (a) 4 0 80 000

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 18

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.8 continued …

Part B Continued …

d) Disclosure continued . . .

BED LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
2. Accounting policies C C

2.1 Deferred taxation

Deferred tax is recognised on differences between carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the
balance sheet method.

3. Income tax expense

Current tax Part (b) 130 000 48 000
Deferred tax Part(a) (80 000) 0
Income tax expense per statement of comprehensive income 50 000 48 000

Tax rate reconciliation: C %

Applicable tax rate (ATR) 40%
Tax effects of:
Profit before tax (150 000 x 40%); (120 000 x 40%) 60 000 48 000
Exempt portion of capital profit (550 000-500 000) x 50% x 40% (10 000) 0
Income tax expense per statement of comprehensive income 50 000 48 000

(50 000 / 150 000) ;

Effective tax rate (48 000 / 120 000) 33.33% 40%

4. Deferred tax asset/ (liability)

The deferred tax balance comprises temporary differences relating to:
Property, plant and equipment 0 (80 000)

Comment from authors:

The tax rate reconciliation would not normally have been needed for 20X4 since the effective tax rate equals the
applicable tax rate. The 20X4 tax rate reconciliation has had to be provided, since IAS 1 Presentation of
financial statements requires that comparatives figures be provided for everything included in the financial
statements.

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 19

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.9

a) Journals

Debit Credit
Income tax expense (P/L) W1 740 850
Current tax payable: income tax (L) 740 850
Current income tax estimated

Income tax expense (P/L) W2.4 1 650

Deferred tax: income tax (L) 1 650
Deferred income tax

Current tax payable: income tax (L) Given 5 000

Income tax expense (P/L) 5 000
Overprovision of 20X1 income tax

b) Note disclosure

UNIVERSAL FITNESS LIMITED

NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 20X2
20X2
4. Income tax expense W1 C
• Current income tax 735 850
- Current tax for 20X7 W1 740 850
- Overprovision of current tax in 20X6 Given (5 000)
• Deferred tax W2.6 1 650
Income tax expense 737 500

Tax rate reconciliation %

Applicable tax rate 30%

Tax effects of:

- Profit before tax W1: 2 350 000 x 0,30 30,00 705 000
- Non-deductible donations 20 000 x 0,30 0,26 6 000
- Exempt dividend income 15 000 x 0,30 (0,19) (4 500)
- Depreciation on non-deductible building 120 000 x 0,30 1,53 36 000
Overprovision of current tax in 20X6 Per above (0,21) (5 000)
Income tax expense 737 500

Effective tax rate 31,38%

Comment: the rate reconciliation need not be provided in percentages and currency. You may choose which
method to present. My suggestion would be as a currency as this is less time-consuming.

10. Deferred tax asset or (liability)

The deferred tax balance is caused by temporary differences arising on:

Equipment W2.3 (79 800)
Unearned income W2.4 19 125
Prepaid expenses W2.5 (7 500)
W2.6 (68 175)

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 20

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.9 continued …

Workings

W1 Current income tax x30%

Profit before tax (2 410 000 + 15 000 – 75 000) 2 350 000
+ Donations 20 000
+ Depreciation on administration building (exempt temporary 120 000
difference)
- Dividends received (15 000)
Temporary differences (5 500)
+ Depreciation on equipment Given 170 000
- Tax allowance Given (188 000)
- Unearned income: o/ balance Recognised as income in 20X2, but (26 250)
already taxed in 20X1
+ Unearned income: c/ balance Taxable in 20X2, to be recognised as 63 750
income in 20X3
- Prepaid expenses: c/ balance Deductible in 20X2, to be recognised as (25 000)
expense in 20X3
Dr TE
Taxable income 2 469 500 740 850 Cr CTP

W2 Deferred income tax

CA TB TD DT
W2.1 Land
31/12/X1 2 470 000 0 (2 470 000) 0 Exempt
0 0 0 0
31/12/X2 2 470 000 0 (2 470 000) 0 Exempt

W2.2 Admin buildings

31/12/X1 1 720 000 0 (1 720 000) 0 Exempt
(120 000) 0 120 000 0 Exempt
31/12/X2 1 600 000 0 (1 600 000) 0 Exempt

W2.3 Equipment
31/12/X1 (2) 800 000 (3) 552 000 (248 000) (74 400) Liability
(1) (170 000) (1) (188 000) (18 000) (5 400) Cr DT
31/12/X2 (1) 630 000 (1) 364 000 (266 000) (79 800) Liability

W2.4 Income received in advance

31/12/X1 (26 250) 0 26 250 7 875 Asset
11 250 Dr DT
31/12/X2 (63 750) 0 63 750 19 125 Asset

W2.5 Prepaid expenses

31/12/X1 0 0 0 0
(7 500) Cr DT
31/12/X2 25 000 0 (25 000) (7 500) Liability

W2.6 Summary of deferred tax C

Proof of deferred tax at 31/12/X1 as per question Given or 74 400 – 7 875 (66 525) Liability
Deferred tax at 31/12/X2 79 800 – 19 125 + 7 500 (68 175) Liability
Movement: increase in deferred tax liability Dr TE; Cr DT (1 650) Cr DT

(1) Given
(2) 630 000 + 170 000 = 800 000
(3) 364 000 + 188 000 = 552 000

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 21

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.10

Part A

a) Calculating the taxable profits and current tax

20X3 20X2 20X1

C C C
Profit before taxation and depreciation (given) 200 000 200 000 200 000
Depreciation:
• First plant (20X1, 20X2 & 20X3: 200 000 x 20%) (40 000) (40 000) (40 000)
• Second plant (20X2 & 20X3: 500 000 x 20%) (100 000) (100 000) 0
Profit before taxation 60 000 60 000 160 000
Temporary differences:
+ depreciation 140 000 140 000 40 000
- wear and tear: first plant (50 000) (50 000) (50 000)
(20X1, 20X2 & 20X3: 200 000 / 4 yrs)
- wear and tear: second plant (125 000) (125 000) 0
(20X2 & 20X3: 500 000 / 4 yrs)
Taxable profits 25 000 25 000 150 000
Tax rate 35% 35% 35%
Current tax 8 750 8 750 52 500

b) Current and deferred tax journals

20X3 20X2 20X1

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
31-Dec Income tax expense ( P/L) 8 750 8 750 52 500
Current tax payable: income tax (L) (8 750) (8 750) (52 500)
Current tax estimate for the current year

31-Dec Income tax expense (P/L) 12 250 12 250 3 500

Deferred tax: income tax (L) (12 250) (12 250) (3 500)
Deferred tax adjustment in the current year

c) Calculation of deferred tax using the balance sheet approach

Carrying Temporary Deferred

amount Tax base differences taxation
01/01/20X1 Opening balance 0 0 0 0
First plant - cost 200 000 200 000 0 0
30/06/20X1 Second plant - cost 500 000 500 000 0 0
Depreciation (40 000) (50 000) (10 000) (3 500) Dr TE Cr DT
31/12/20X1 Balance at 35% 660 000 650 000 (10 000) (3 500) Liability
Depreciation - first plant (40 000) (50 000) (10 000) (3 500) Dr TE Cr DT
Depreciation - second plant (100 000) (125 000) (25 000) (8 750) Dr TE Cr DT
31/12/20X2 Balance at 35% 520 000 475 000 (45 000) (15 750) Liability
Depreciation - first plant (40 000) (50 000) (10 000) (3 500) Dr TE Cr DT
Depreciation - second plant (100 000) (125 000) (25 000) (8 750) Dr TE Cr DT
31/12/20X3 Balance at 35% 380 000 300 000 (80 000) (28 000) Liability

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 22

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.10 continued…

Part A continued …

d) Statement of comprehensive income

SWEATSHOP LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED 31 DECEMBER 20X1, 20X2, 20X3
Note 20X3 20X2 20X1
C C C
Profit before tax 60 000 60 000 160 000
Income tax expense 3 (21 000) (21 000) (56 000)
Profit for the period 39 000 39 000 104 000
Other comprehensive income - - -
Total comprehensive income 39 000 39 000 104 000

e) Statement of financial position

SWEATSHOP LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X1, 20X2, 20X3
Note 20X3 20X2 20X1
C C C
ASSETS
Non-current assets
Plant 380 000 520 000 660 000

EQUITY AND LIABILITIES

Non-current liabilities
Deferred tax 4 28 000 15 750 3 500

Current liabilities
Current tax payable 8 750 8 750 52 500

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 23

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.10 continued…

Part A continued …

f) Notes

SWEATSHOP LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 20X1, 20X2, 20X3

3. Income tax expense 20X3 20X2 20X1

C C C
Current tax Part a 8 750 8 750 52 500
Deferred tax Part c 12 250 12 250 3 500
Income tax expense per statement of comprehensive 21 000 21 000 56 000
income

Tax rate reconciliation % % %

Applicable tax rate 35,0 35,0 35,0

Tax effects of: C C C

Profit before tax 20X2 and 20X3: 21 000 21 000 56 000
60 000 x 35%
20X1: 160 000 x 35%
Income tax expense per statement of comprehensive 21 000 21 000 56 000
income

% % %
Effective tax rate 20X2 and 20X3: 35,0 35,0 35,0
21 000 / 60 000
20X1: 56 000 / 160 000

4. Deferred taxation liability 20X3 20X2 20X1

C C C
The deferred tax balance is caused by temporary
differences relating to:
- Plant Part c) (28 000) (15 750) (3 500)

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 24

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.10 continued …

Part B

a) Calculating the taxable profits and current tax

20X3 20X2 20X1

C C C
Profit before taxation and depreciation (given) 200 000 200 000 200 000
Depreciation:
• First plant (20X1, 20X2 & 20X3: 200 000 x 30%) (40 000) (40 000) (40 000)
• Second plant (20X2 & 20X3: 500 000 x 20%) (100 000) (100 000) 0
Profit before taxation 60 000 60 000 160 000
Temporary differences:
+ depreciation 140 000 140 000 40 000
- wear and tear (20X1: 200K/ 4 years) (175 000) (175 000) (50 000)
(20X2 & 20X3: 200K/ 4 years + 500K/ 4 years)
Taxable profits 25 000 25 000 150 000
Tax rate 35% 45% 40%
Current tax 8 750 11 250 60 000

b) Current and deferred tax journals

20X3 20X2 20X1

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
01-Jan Income tax expense (P/L) (4 500) 500 n/a
Deferred tax: income tax (L) 4 500 (500) n/a
Recording effect of rate change on opening
balance of deferred taxation

31-Dec Income tax expense (P/L) 8 750 11 250 60 000

Current tax payable: income tax (L) (8 750) (11 250) (60 000)
Recording estimated current tax owing

31-Dec Income tax expense (P/L) 12 250 15 750 4 000

Deferred tax: income tax (L) (12 250) (15 750) (4 000)
Recording current year’s deferred tax charge

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 25

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.10 continued…

Part B continued …

c) Calculation of deferred tax using the balance sheet approach

Carrying Temporary Deferred
amount Tax base differences taxation
01/01/20X1 Opening balance 0 0 0 0
First plant - cost 200 000 200 000 0 0
30/06/20X1 Second plant 500 000 500 000 0 0
Depreciation (40 000) (50 000) (10 000) (4 000) Dr TE Cr DT
31/12/20X1 Balance at 40% 660 000 650 000 (10 000) (4 000) Liability
Rate change: 40% to 45% (500) Dr TE Cr DT
01/01/20X2 Balance restated at 45% 660 000 650 000 (10 000) (4 500)
Depreciation - first plant (40 000) (50 000) (10 000) (4 500) Dr TE Cr DT
Depreciation - second plant (100 000) (125 000) (25 000) (11 250) Dr TE Cr DT
31/12/20X2 Balance at 45% 520 000 475 000 (45 000) (20 250) Liability
Rate change: 45% to 35% 4 500 Cr TE Dr DT
01/01/20X3 Balance restated at 35 % (45 000) (15 750)
Depreciation - first plant (40 000) (50 000) (10 000) (3 500) Dr TE Cr DT
Depreciation - second plant (100 000) (125 000) (25 000) (8 750) Dr TE Cr DT
31/12/20X3 Balance at 35% 380 000 300 000 (80 000) (28 000) Liability

d) Statement of comprehensive income

SWEATSHOP LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED 31 DECEMBER 20X1, 20X2, 20X3
Note 20X3 20X2 20X1
C C C
Profit before tax 60 000 60 000 160 000
Income tax expense 3 (16 500) (27 500) (56 000)
Profit for the period 43 500 32 500 104 000
Other comprehensive income - - -
Total comprehensive income 43 500 32 500 104 000

e) Statement of financial position

SWEATSHOP LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X1, 20X2, 20X3
Note 20X3 20X2 20X1
C C C
ASSETS
Non-current assets
Plant 380 000 520 000 660 000
EQUITY AND LIABILITIES
Non-current liabilities
Deferred tax: 4 28 000 20 250 4 000
Current liabilities
Current tax payabl 8 750 11 250 60 000

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 26

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.10 continued…

Part B continued …

f) Notes

SWEATSHOP LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 20X1, 20X2, 20X3

3. Income tax expense 20X3 20X2 20X1

C C C
Current tax Part a) 8 750 11 250 60 000
Deferred tax
- current year 20X3: Part c) 3 500 + 8 750 12 250
temporary 20X2: Part c) 4 500 + 11 250 15 750
differences 20X1: Part c) 4 000 4 000
- rate change Part c) (4 500) 500
Income tax expense per statement of comprehensive income 16 500 27 500 64 000

Tax rate reconciliation % % %

Applicable tax rate 35,0 45,0 40,0

Tax effects of: C C C

Profit before tax 20X3: 60 000 x 35% 21 000 27 000 64 000
20X2: 60 000 x 45%
20X1: 160 000 x 40%
Rate change Above (4 500) 500

Income tax expense per statement of comprehensive income 16 500 27 500 56 000

% % %
Effective tax rate 20X3: 16 500/ 60 000 27,5 45,8 35,0
20X2: 27 500/ 60 000
20X1: 56 000/ 160 000

4. Deferred taxation liability 20X3 20X2 20X1

C C C
The deferred tax balance is caused by temporary differences
relating to:
- Plant Part c) 28 000 20 250 4 000

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 27

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.11

MEMORANDUM
To: Managing Director
From: Fred, the accountant
Date: 26 February 20X9

Dear Sir

This memo is in response to your request for a memo outlining the reasoning behind the deferred tax
asset of C450 000.

a) Deferred tax compared to current tax

Deferred tax is different to current tax:

• A deferred tax asset does not represent any monies actually receivable from the tax authorities.
• Deferred tax is merely a book entry that attempts to show the tax expense and tax liability on the
accrual basis (i.e. using IFRS as a basis), rather than on the basis of the Tax Act.
• A current tax asset, on the other hand, reflects an amount currently receivable from the tax
authorities based on the Tax Act (and could happen as a result of an overpayment of tax).

b) Calculation of deferred tax

Deferred tax is calculated, using the balance sheet approach, by:

• first calculating the difference between the carrying amount of all line items causing temporary
differences and their tax bases;
• then multiplying the temporary difference by the tax rate to get a deferred tax balance.

c) Explanation of ‘income received in advance’ in terms of the Conceptual Framework

In terms of the Conceptual Framework for Financial Reporting, the carrying amount of the income
received in advance, as a liability, represents:
• A present obligation of the entity
• To transfer an economic resource
• As a result of a past event

The present obligation is the duty or responsibility to provide the goods (the sail) in the future. The
economic resource to be transferred is the inventory (again the sail). The past event is the receipt in
advance of the cash.

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 28

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.11 continued . . .

d) Explanation of tax base of ‘income received in advance’

According to IAS12, the tax base of a liability depends on what the liability represents:
• For liabilities that do not represent income received in advance, the tax base ‘is its carrying
amount, less any amount that will be deductible for tax purposes in respect of that liability in
future periods’; and
• For liabilities that represent income which is received in advance, the tax base ‘is its carrying
amount, less any amount of the revenue that will not be taxable in future periods’.

This liability is income received in advance and since the tax authorities taxed the receipt in 20X8, the
tax base at 31 December 20X8 is nil (the CA of C1 500 000 – portion already taxed and thus won’t be
taxed in future: C1 500 000 = nil).

e) Type of temporary difference

According to IAS 12, deductible temporary differences are defined as ‘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’.

The C1 500 000 is taxed in 20X8 but will be included as income in 20X9. Hence, we need to deduct
the C1 500 000 from the 20X9 profit before tax in order to calculate the 20X9 taxable profit. The
balance thus reflects a deductible temporary difference.

f) Deferred tax asset

In terms of the Conceptual Framework for Financial Reporting, the carrying amount of the deferred
tax, as an asset, represents:
• A present economic resource (a right that has the potential for future economic benefits)
• Controlled by the entity
• As a result of a past event

Foundit Limited has a right to claim the tax deduction in the 20X9 year giving rise to a future
economic benefit in the form of a reduction in tax that otherwise would have been owing in 20X9. It
is controlled in that tax was paid in 20X8 on future income (which will be earned in 20X9) and this
payment of tax will reduce the tax for 20X9. The past event is the receipt of the C1 500 000 in 20X8.

The recognition criteria:

• The flow of future economic benefits must be probable; and
• The cost of value can be measured reliably.

The information is
• Relevant as the inflow of economic benefits is probable as the 20X9 tax assessment will be
C450 000 less because of the future deduction
• The information is faithfully represented as a reliable estimate of the amount of the future taxation
payable is possible

Sincerely

_______________
Fred the accountant

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 29

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.12
a) Calculation of current income tax

20X3 20X2
Profit before tax Given 900 000 800 000
- Dividend income Given (200 000) (300 000)
Permanent differences
- depreciation on building 20X3: (700 000 - 0) / 7 years x 9/12 75 000 0
20X2: N/A (not yet available for use)
Temporary differences
- Add depreciation on plant 20X3: (800 000 + 400 000 - 100 000) / 10 x 12/12 110 000 55 000
20X2: (800 000 + 400 000 - 100 000) / 10 x 6/12
- Less wear and tear 20X3: (800 000 + 400 000) x 20% (240 000) (240 000)
20X2: (800 000 + 400 000) x 20%
- Add research expense Given 600 000 400 000
- Less research costs that are 20X3: (400 000 + 600 000) / 4 years (250 000) (100 000)
tax deductible
20X2: 400 000 / 4 years
- Add IRIA c/b Given 800 000 300 000
- Less IRIA o/b Given (300 000) (1200 000)

Taxable profit (tax loss) before tax losses b/f 1 495 000 (285 000)
Tax loss brought forward 20X2: given (1 085 000) (800 000)
20X3: carried forward from 20X2
Taxable profit (tax loss) after tax losses b/f 410 000 (1 085 000)

Current income tax at 30% / at 40% 123 000 0

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 30

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.12 continued ...

b) Calculation of deferred income tax

CA TB TD DT

Closing balances at 31 December 20X2 (at 40%): 600 000 A

Land CA: Given; TB: Not deductible 2 000 000 0 (2 000 000) 0 Exempt

Buildings CA & TB: Not yet acquired 0 0 0 0

Plant CA: '800 000 + 400 000 - 55 000 (a) 1 145 000 960 000 (185 000) (74 000) L
TB: 800 000 + 400 000 - 240 000 (a)

Research CA: Research all expensed 0 300 000 300 000 120 000 A
TB: 400 000 / 4 x 3; or
TB: 400 000 - 100 000 (a)

IRIA CA: Given; TB: Taxed in year of receipt (300 000) 0 300 000 120 000 A

Tax loss CA: always nil; TB: see part (a) 0 1 085 000 1 085 000 434 000 A

Rate change: reduction of 10%: 600 000 / 40% x 10% (150 000) Cr DT
Dr TE
Balance 1/1/20X3 at 30%: 600 000 / 40% x 30% 450 000 A

Movement in temporary differences: 450 000 – 340 500 (109 500) Cr DT

Dr TE
Closing balances at 31 December 20X3 (at 30%): 340 500 A

Land CA: Given; TB: Not deductible 2 000 000 0 (2 000 000) 0 Exempt

Buildings CA: 700 000 - 75 000 (a); TB: Not deductible 625 000 0 (625 000) 0 Exempt

Plant CA: 800 000 + 400 000 - 55 000 (a) - 110 000 (a) 1 035 000 720 000 (315 000) (94 500) L
TB: 800 000 + 400 000 - 240 000 (a) -240 000
(a)

Research CA: Research all expensed 0 650 000 650 000 195 000 A
TB: 400 000 / 4 x 2 + 600 000 / 4 x 3 or
TB: 400 000+ 600 000 – 100 000 (a) -250 000 (a)

IRIA CA: Given;TB: Taxed in year of receipt (800 000) 0 800 000 240 000 A

Tax loss CA: always nil; TB: 1 085 000 - 1 085 000 used 0 0 0 0

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 31

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.12 continued ...

c) Income tax expense note

JABULANI LIMITED
NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 20X3

36. Income tax expense 20X3

C
Income tax
Current See part (a) 123 000
Deferred 259 500
- Current year temporary differences 560 000 A / 40% x 30% - 340 500 A 109 500
- Prior year rate change 560 000 A / 40% x 10% 150 000

Income tax expense per statement of comprehensive income 382 500

Tax rate reconciliation:

Applicable tax rate 30.0%

Tax effects of:

Profit before tax 900 000 x 30% 270 000
Prior year rate change Per above 150 000
Dividend income 200 000 x 30% (60 000)
Non-deductible depreciation 75 000 x 30% 22 500
Income tax expense per statement of comprehensive income 382 500

Effective tax rate 382 500 / 900 000 42,5%

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 32

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.13

a) Calculation of current income tax and deferred income tax

Workings

W1 Calculation of current income tax

20X3 20X2 20X1

C C C
Profit before tax 30 000 20 000 14 000
Exempt dividend income (10 000) (10 000) (10 000)
Temporary differences (PPE) (8 000) (4 000) (14 000)
Assessed tax loss brought forward (4 000) (10 000) 0
Taxable profit/ (tax loss) 8 000 (4 000) (10 000)

Current income tax at 30% 2 400 0 0

W2 Calculation of deferred income tax

Carrying Tax base Temporary Deferred tax Deferred tax

amount difference at 30% balance/
(SOFP) (IAS 12) (b) – (a) (c) x 30% adjustment
(a) (b) (c) (d)
W2.1 PPE
Balance: 1 Jan 20X1 70 000 90 000 20 000 6 000 Asset
Movement (6 000) (20 000) (14 000) (4 200) Cr DT Dr TE
Balance: 31 Dec 20X1 64 000 70 000 6 000 1 800 Asset
Movement (16 000) (20 000) (4 000) (1 200) Cr DT Dr TE
Balance: 31 Dec 20X2 48 000 50 000 2 000 600 Asset
Movement (12 000) (20 000) (8 000) (2 400) Cr DT Dr TE
Balance: 31 Dec 20X3 36 000 30 000 (6 000) (1 800) Liability

W2.2 Tax loss

Balance: 1 Jan 20X1 0 0 0 0
Movement 3 000 Dr DT Cr TE
Balance: 31 Dec 20X1 0 10 000 10 000 3 000 Asset
Movement 0 (1 800) Cr DT Dr TE
Balance: 31 Dec 20X2 0 4 000 4 000 1 200 Asset
Movement 0 (1 200) Cr DT Dr TE
Balance: 31 Dec 20X3 0 0 0 0

W2.3 Summary PPE Tax loss Total

Total Recognised Unrecognised Total Recognised Unrecognised Total Recognised Unrecognised
a b c d e f g h i

O/ balance 20X1 6 000 0 6 000 0 0 0 6 000 6 000

Movement (4 200) 0 (4 200) 3 000 0 3 000 (1 200) (1 200)
C/ balance 20X1 1 800 0 1 800 3 000 0 3 000 4 800 4 800
Movement (1 200) 0 (1 200) (1 800) 0 (1 800) (3 000) (3 000)
C/ balance 20X2 600 0 600 1 200 0 1 200 1 800 1 800
Movement: (2 400) (1 800) (600) (1 200) 0 (1 200) (3 600) (1 800) (1 800)
C/ balance 20X3 (1 800) (1 800) 0 0 0 0 (1 800) (1 800) 0

Please note: when the unrecognised portion of a DTA is reduced (see columns c and f), this means that some of
what was previously unrecognised is now recognised (i.e. see column c: 6 000 DTA relating to PPE was initially
not recognised, but by the end of 20X1, the portion that was unrecognised was only 1 800: this therefore means
that 4 200 was recognised – see journals).

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 33

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.13 continued …

b) Journals
Journals 20X1 Debit Credit
Income tax expense (P/L) W2.1 4 200
Deferred tax: income tax (L)) 4 200
DT adjustment caused by PPE: DTA reversing due to temporary differences
reversing (20X1) NOTE 1

Deferred tax: income tax (L)) W2.3: column (c) 4 200

Income tax expense (P/L) 4 200
Prior year DTA recognised now that it has reversed (jnl above): PPE (20X1)
Journals 20X2
Income tax expense (P/L) W2.1 1 200
Deferred tax: income tax (L) 1 200
DT adjustment caused by PPE: DTA reversing due to temporary differences
reversing (20X2) NOTE 1

Deferred tax: income tax (A) W2.3: column (c) 1 200

Income tax expense (P/L) 1 200
Prior year DTA recognised now that it has reversed (jnl above): PPE (20X2)

Income tax expense (P/L) W2.2 1 800

Deferred tax: income tax(L) 1 800
DT adjustment caused by tax loss: DTA reduces due to tax loss partially used
(20X2) NOTE 1

Deferred tax: income tax (A) W2.3: column (f) 1 800

Income tax expense (P/L) 1 800
Prior year DTA recognised now that it was used (i.e. jnl above): tax loss (20X2)

Journals 20X3
Income tax expense (P/L) W2.1: 600 + 1 800 2 400
Deferred tax: income tax (L) 2 400
DT adjustment caused by PPE: DTA reversed (600) and a DTL (1 800) created
due to temporary differences reversing: PPE (20X3) NOTE 1

Deferred tax: income tax (A) W2.3: column (c) 600

Income tax expense (P/L) 600
Prior year DTA recognised now that it has reversed (jnl above): PPE (20X3)

Income tax expense (P/L) W2.2 1 200

Deferred tax: income tax (L) 1 200
DT adjustment caused by tax loss: DTA reduces due to remaining tax loss being
used (20X3) NOTE 1

Deferred tax: income tax (A) W2.3: column (f) 1 200

Income tax expense (P/L) 1 200
Prior year DTA recognised now that it was used (i.e. jnl above): tax loss (20X3)

Income tax expense (P/L) W1 2 400

Current tax payable: income tax (L) 2 400
Current tax payable 20X3
Note 1: The journal is processed showing that a DTA asset was reversed (see W2.1 & W2.2). The problem is that since the
company did not want to recognise deferred tax assets, the original 6 000 DTA on PPE and the original 3 000 DTA on the
tax loss that are reversed were not recognised in the first place! This is the reason for the next journals where the part of the
DTA that is reversing is now suddenly recognised. The effect is nil on the balances, but these journals are necessary since
disclosure of this movement is required.

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 34

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.13 continued …

c) Notes

REFLECTION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X3, 20X2 AND 20X1
20X3 20X2 20X1
15. Income tax expense C C C

• Current tax 2 400 0 0

• Deferred tax
- Current year movement in temporary differences W2.3 3 600 3 000 1 200
- Current year DTA not recognised W2.3 0 0 3 000
- Prior year unrecognised DTA now recognised W2.3/jnls (1 800) (3 000) (4 200)
Tax expense per the statement of comprehensive income 4 200 0 0

Tax rate reconciliation

Applicable tax rate 30% 30% 30%

Tax effects of:

Profit before tax (20X3: 30 000 x 30%) 9 000
(20X2: 20 000 x 30%) 6 000
(20X1: 14 000 x 30%) 4 200
Exempt dividend (20X1 - 20X3: 10 000 x 30%) (3 000) (3 000) (3 000)
income
Current year DTA not recognised: tax loss Per above 0 0 3 000
Prior year unrecognised DTA now recognised Per above (1 800) (3 000) (4 200)
Tax expense per the statement of comprehensive income 4 200 0 0

Effective tax rate (4 200 / 30 000) 14% 0% 0%

5. Deferred tax asset/ (liability)

The deferred tax balance comprises tax on the following types of temporary differences:
Property, plant and equipment (1 800) 0 0
Tax loss 0 0 0
(1 800) 0 0

Comment:
The 20X2 financial statements would have required the following additional disclosure:

“A deferred tax asset of C600 relating to deductible temporary differences of C 2 000 and a deferred tax asset of
C1 200 relating to an unused tax loss of C4 000 have not been recognised due to the fact that future taxable
profits are not expected in the foreseeable future (20X1: Unrecognised deferred tax amounts were C1 800 and
C3 000 respectively). These deductible temporary differences and unused tax losses have no expiry dates.”

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 35

 Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.14

a) Calculation of current tax and deferred tax

Workings

W1 Calculation of current tax

20X3 20X2 20X1

C C C
Profit before tax (20 000) (10 000) 10 000
Exempt income (20 000) (20 000) (20 000)
Assessed tax loss brought forward (140 000) (110 000) (100 000)
Taxable profit/ (tax loss) (180 000) (140 000) (110 000)

Current income tax at 30% 0 0 0

W2 Calculation of deferred tax

Carrying Tax base Temporary Deferred tax at Deferred tax

amount (IAS 12) difference 30% balance/
(SOFP) (b) – (a) (c) x 30% adjustment
(a) (b) (c) (d)
W2.1 Tax loss
Balance: 1 Jan 20X1 0 100 000 100 000 30 000 Asset
Movement 3 000 Dr DT Cr TE
Balance: 31 Dec 20X1 0 110 000 110 000 33 000 Asset
Movement 0 9 000 Dr DT Cr TE
Balance: 31 Dec 20X2 0 140 000 140 000 42 000 Asset
Movement 0 12 000 Dr DT Cr TE
Balance: 31 Dec 20X3 0 180 000 180 000 54 000 Asset

W2.2 Summary Other temporary differences Tax loss

Total Recognised Unrecognised Total Recognised Unrecognised
O/ balance 20X1 0 0 0 30 000 30 000 0
Movement 0 0 0 3 000 3 000 0
C/ balance 20X1 0 0 0 33 000 33 000 0
Derecognise (1) (33 000) 33 000
Movement 0 0 0 9 000 0 9 000
C/ balance 20X2 0 0 0 42 000 0 42 000
Re-recognise (2) 33 000 (33 000)
Recognise (3) 9 000 (9 000)
Movement 0 0 0 12 000 12 000 0
C/ balance 20X3 0 0 0 54 000 54 000 0

(1) Write-down of an asset – derecognising the asset

(2) Write-back of an asset – re-recognising the asset that was derecognised in a prior year
(3) Recognising a deferred tax asset that had never been recognised before

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 36

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.14 continued …

b) Journal entries

20X3 20X2 20X1

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)

Deferred tax: income tax (A) W2.1 & W2.2 12 000 0 3 000
Income tax expense (P/L) (12 000) 0 (3 000)
Deferred tax adjustment: tax loss increased

Income tax expense (P/L) W2.2 0 33 000 0

Deferred tax: income tax (L) 0 (33 000) 0
Write-down of prior year DTA caused by tax loss since future
profitability is now in question (only in 20X2)

Deferred tax: income tax (A) W2.2 33 000 0 0

Income tax expense (P/L) (33 000) 0 0
Write back of previously written down DTA caused by tax loss:
sufficient profitability is now expected such that the tax loss will be
able to be used

Deferred tax: income tax (A) W2.2 9 000 0 0

Income tax expense (P/L) (9 000) 0 0
Prior year DTA caused by tax loss now recognised for the first time:
sufficient profitability is now expected such that the tax loss will be
able to be used

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 37

Solutions to GAAP : Graded Questions Taxation: Deferred taxation

Solution 6.14 continued …

c) Notes

STALK LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X3, 20X2 AND 20X1
20X3 20X2 20X1
15. Income tax expense C C C

Current tax 0 0 0
Deferred tax
- Current year movement in temp differences W2.1 (12 000) (9 000) (3 000)
- Current year DTA not recognised W2.2 9 000 0
- Prior year DTA written-down/ (back) W2.2/ Jnl (33 000) 33 000 0
- Prior year unrecognised DTA now recognised W2.2/ Jnl (9 000) 0 0
Tax expense per statement of comprehensive income (54 000) 33 000 (3 000)

Tax rate reconciliation

Applicable tax rate 30% 30% 30%
Tax effects of:
Profit before tax 20X3: (20 000 loss x 30%) (6 000) (3 000) 3 000
20X2: (10 000 loss x 30%)
20X1: (10 000 profit x 30%)
Exempt dividend income 20 000 x 30% (each year) (6 000) (6 000) (6 000)
Current year deferred tax asset not recognised: W2.2 0 9 000 0
Prior year DTA written down/(written back): W2.2 (33 000) 33 000 0
Prior year unrecognised DTA now recognised: W2.2 (9 000) 0 0

Tax expense per the statement of comprehensive income (54 000) 33 000 (3 000)

Effective tax rate 20X3: (54 000 tax income / 20 000 loss) (270%) (333%) (30%)
20X2: (33 000 expense / 10 000 loss)
20X1: (3 000 tax income / 10 000 profit)

16. Deferred income tax asset

The deferred tax balance comprises tax on the following types of

temporary differences:
Tax loss 54 000 0 33 000
54 000 0 33 000

Comment:
The 20X2 financial statements would have required the following additional disclosure:

“A deferred tax asset of C42 000 on an unused tax loss of C140 000 at 31 December 20X2 has not been
recognised since taxable economic benefits are not probable in the foreseeable future (20X1: Unrecognised
deferred tax assets were nil).”

© Service & Kolitz, 2022 - 2023 Chapter 6: Page 38