IAS 12: INCOME TAXES

Practice Questions
FINANCIAL REPORTING
COMPILED BY: MURTAZA QUAID, ACA
IAS 12: Income Taxes Compiled by: Murtaza Quaid

IAS 12: INCOME TAXES

Question 1. [IFRS Kit – IFRS Box]
Haseeb ltd. is a manufacturing company who wishes to calculate its taxable profit or loss for the year
ended 31 December 2017. There are the statement of profit or loss and statement of financial position
and the notes below.

Statement of financial position as of 31 December 2017

ASSETS PKR EQUITY & LIABILITIES PKR
Equity
Non-current assets Share capital 600,000
Accumulated profits 452,060
Property, plant and equipment 556,000
Product development costs 30,000
Long term Investments 220,000 Long-term liabilities
Bank loan 20,000
Current assets Liability for product warranty costs 8,000
Deferred tax liability (from 2016) 11,081
Short term investments 104,000
Trade receivables 313,000 Current liabilities
Inventories 152,000 Trade payables 382,000
Cash and cash equivalents 134,000 Other payable 35,000

TOTAL ASSETS 1,509,000 TOTAL EQUITY & LIABILITIES 1,509,000

Statement of profit or loss for the year ended 31 December 2017

PKR
Revenue 2,402,000
Cost of sales (1,920,000)
Gross profit 482,000
Operating costs (384,000)
Profit from operations 98,000
Finance costs (13,000)
Profit before taxation 85,000

IQ School of Finance 2
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Additional information:
1. Depreciation expense for the year 2017 allowable in line with tax legislation is Rs. 103,000.
Accounting depreciation included in operating costs is Rs. 85,000. Cost of PPE is Rs. 800,000 and
Haseeb Ltd. deducted expenses of Rs. 208,000 in its tax returns prior the year 2017.
2. In 2014, Haseeb Ltd. incurred product development costs of Rs. 50,000. These costs were recognized
as an asset and amortized over period of 10 years. For tax purposes, Haseeb Ltd. deducted full
product development costs in 2014.
3. Bad debt provision amounts to Rs. 65,000 and relates to 2 debtors: debtor A – Rs. 40,000 (receivable
originates in 2015 and 100% provision was recognized in 2016) and debtor B – Rs. 25,000 (receivable
originates in 2016 and 100% provision was recognized in 2017). Tax law allows deduction of 20% of
provision for debtors overdue for more than 1 year, another 30 % for debtors overdue for more
than 2 years and remaining 50% for debtors overdue for more than 3 years.
4. Haseeb Ltd. accounts for inventory obsolescence provision. New provision created in 2017 was Rs.
5,400 (total provision: Rs. 9,000). This provision is not tax deductible, as it is a general provision.
5. In 2017, Haseeb Ltd. incurs provision for product warranty costs of Rs. 2,500. Product warranty costs
are not tax deductible until the company pays claims. Claims paid in 2017 amounted to Rs. 3,100.
6. Expenses for representation and promotion included in operating expenses amount to Rs. 900.
These are not deductible for tax purposes.
7. Tax law allows to deduct expenses for petrol only up to Rs. 2,000 per vehicle per year. Haseeb Ltd.
had 4 vehicles in 2017 and its total petrol expenses amounted to Rs. 10,300.
Required: Calculate taxable profit for 2017 and the related current tax expense. Tax rate is 30%.

Question 2. [Current Tax] [ICAP Study Support Material]

Kashif traders had an accounting profit before of tax of Rs. 1,000,000. Below is a list of admissible and
inadmissible deductions under Income Tax Ordinance 2001:
Inadmissible Deductions:
 Accounting Depreciation Rs. 100,000
 Provision for Doubtful Debt Rs. 15,000
Admissible Deductions:
 Tax Depreciation Rs. 150,000
 Trade debts actually written off Rs. 5,000
Corporate tax rate on Kashif traders is 30%.
Required: Calculate taxable profit and the related current tax expense.

IQ School of Finance 3
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question 3. [Current Tax] [ICAP Study Support Material]

Jhelum Traders (JT) had an accounting profit of Rs. 789,000 for the year ended 31 December 2017. The
following information is relevant:
(i) The accounting profit was after depreciation of Rs. 70,000 and included a profit on disposal
(capital gain) of Rs. 97,000. Accounting depreciation is not allowable for tax purposes. Capital
gains are not taxable.
(ii) At 1 January 2017 the tax written down value of machinery was Rs. 120,000 and for buildings
was Rs. 600,000. Tax depreciation is claimable at 10% per annum for buildings and 15% per
annum for machinery applied to tax written down value at the start of the year.
(iii) JT had incurred borrowing costs of Rs. 70,000 in the year of which Rs. 10,000 had been
capitalised in accordance with IAS 23. All borrowing costs are deductible for tax purposes.
(iv) JT had paid fines of Rs. 125,000 due to non-compliances with the requirements of the
Companies Act, 2017. Fines are not tax deductible.
(v) JT holds some assets under leases. During the year it had recognised finance cost in respect of
the leases was Rs. 15,000 and rentals paid were Rs. 80,000. The depreciation on right of use
assets is included in accounting depreciation above. Lease rentals are deductible in full for tax
purposes. Tax is paid at 30%
Required: Compute the current tax payable for JT for the year 2017.

Question 4. [Over-estimate or under-estimate of tax] [ICAP Study Support Material]

Fresh Company has a financial year ending on 31 December. At 31 December 2016 it had a liability for
income tax of Rs. 77,000. The tax on profits for the year to 31 December 2017 was Rs. 114,000.
The tax charge for the year to 31 December 2016 was over-estimated by Rs. 6,000.
During the year to 31 December 2017, the company made payments of Rs. 123,000 (i.e. Rs. 71,000 for
payment of last year’s tax and Rs. 52,000 advance tax for the current year) in income tax.
Required: Prepare ledgers and calculate current tax expense and liability for the year ended 31
December 2017.

Question 5. [Deferred Tax]

Sheroze Ltd. acquires a machine for Rs. 400,000 and decides to depreciate it straight-line over its useful
life of 5 years. Income tax legislation in Sheroze Ltd. country allows depreciating machines straight-line
over 4 years. In the years 1-5, Sheroze Ltd. accounting profit and taxable income before depreciation
expense is Rs. 200,000 and the tax rate is 30%.
Required: Show Sheroze Ltd. current tax expense, deferred tax expense, deferred tax asset/liability and
the net profit in the years 1-5.

IQ School of Finance 4
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question 6. [Deferred Tax] [ICAP Study Support Material]

Kashif Limited (KL) made accounting profit before tax of Rs. 50,000 in each of the years, 2021, 2022 and
2023 and pays tax at 30%.
KL bought an item of plant on 1 January 2021 for Rs. 10,000. This asset is to be depreciated on a straight
line basis over 3 years and has an estimated residual value of Rs. 1,000.
Accounting depreciation is not allowed as a taxable deduction in the jurisdiction in which KL operates.
Instead tax depreciation at 40% reducing balance method is allowed.
On 31 December 2023, KL disposed the asset for Rs. 1,000. The gain on disposal is taxable and loss on
disposal is deductible under relevant tax laws.
Required: Prepare extracts of statement of profit or loss from 2021 to 2023 showing profit before tax,
tax expense and profit after tax.

Question 7. [ICAP Study Support Material]

Mars Limited (ML) is engaged in the manufacturing of chemicals. On July 1, 2014 it obtained a motor
vehicle on lease from a bank. Details of the lease agreement are as follows:
(i) Instalments of Rs. 480,000 are to be paid annually in advance.
(ii) The lease term and useful life is 4 years and 5 years respectively.
(iii) The interest rate implicit in the lease is 13.701%.
(iv) Present value of lease payments has been calculated as Rs. 1,600,000
ML follows a policy of depreciating the motor vehicles over their useful life, on the straight-line method.
However, the tax department allows only the lease payments as a deduction from taxable profits.
On 30 June 2015, ML revalued its land from cost of Rs. 2,000,000 to its fair value of Rs. 2,400,000. Tax
authorities do not include revaluation gains in calculation of taxable profits.
The tax rate applicable to ML is 30%. ML’s accounting profit before tax for the year ended June 30, 2015
is Rs. 4,900,000. Since it is first year of ML’s operations, there was no deferred tax liability balance as at
June 30, 2014.
There are no temporary differences other than those evident from the information provided above.
Required: Prepare journal entries in the books of Mars Limited for the year ended June 30, 2015 to
record current tax and defrred tax (revaluation and lease entries are not required).

Question 8. [ICAP Study Support Material]

Bee Limited (BL) had an accounting profit before tax of Rs. 500,000. This income of Rs. 30,000 which is
not taxable (exempt) and expenses of Rs. 10,000 which are not allowed as deduction (neither when
incurred nor when paid).
Accounting depreciation in the year was Rs. 100,000 and tax allowable depreciation was Rs. 150,000.
This means that a taxable temporary difference of Rs. 50,000 originated in the year.
Applicable tax rate is 30%.
Required: Compute tax expense for BL and prepare tax reconciliation in absolute amount and in
percentages.

IQ School of Finance 5
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question 9. [ICAP Study Support Material]

The following data relates to Adeel Limited (AL) for the year ended 30 June 2022:
(i) Current tax for the current year has been computed at Rs. 129,000
(ii) Last year current tax was estimated to be Rs. 116,000, however, on finalisation of assessment
only Rs. 111,000 had to be paid.
(iii) The opening balance of deferred tax liability is Rs. 30,000 (calculated at 30% on taxable
temporary differences of Rs. 100,000).
(iv) At 30 June 2022, AL has taxable temporary differences of Rs. 180,000 and during the year tax
rate changed to 25%.
Required: Prepare a note on taxation expense for the year ended 30 June 2022, so far as information
allows, reflecting major components of tax.

Question 10. [ICAP Study Support Material]

Smart Shep Limited (SSL) was incorporated on 1 January 2015.
The following information relevant for the year ended 31 December 2015.
(i) SSL made a profit before taxation of Rs. 121,000.
(ii) SSL made the following capital additions:
 Plant Rs. 48,000
 Motor vehicles Rs. 12,000
(iii) Accounting depreciation Rs. 11,000
Tax depreciation Rs. 15,000
Tax is chargeable at a rate of 30%.
The following information relevant for the year ended 31 December 2016.
(i) SSL made a profit before taxation of Rs. 125,000.
(ii) Interest payable: On 1st April 2016 SSL issued Rs. 25,000 of 8% debentures. Interest is paid in
arrears on 30th September and 31st March. Assume that tax relief on interest expense is only
given when the interest is paid.
(iii) Interest receivable: On 1st April SSL purchased debentures having a nominal value of Rs. 4,000.
Interest at 15% pa is receivable on 30th September and 31st March. Assume that interest
income is not taxed until the cash is actually received.
(iv) Provision for warranty: In preparing the financial statements for the year to 31st December
2016, SSL has recognised a provision for warranty payments in the amount of Rs. 1,200. This has
been correctly recognised in accordance with IAS 37 and the amount has been expensed.
Assume that tax relief on the warranty cost is only given when the expense is paid.
(v) Fine: During the period SSL has paid a fine of Rs. 6,000. The fine is not tax deductible.
(vi) Accounting depreciation Rs. 14,000
Tax depreciation Rs. 16,000
Tax is chargeable at a rate of 30%.

IQ School of Finance 6
IAS 12: Income Taxes Compiled by: Murtaza Quaid

The following information relevant for the year ended 31 December 2017.
(i) SSL made a profit before taxation of Rs. 175,000.
(ii) Interest payable: The debentures are still in issue.
(iii) Interest receivable: SSL still holds the debentures.
(iv) Provision for warranty: During the year SSL had paid out Rs. 500 in warranty claims and
provided for a further Rs. 2,000.
(v) Development costs: During 2017 SSL has capitalised development expenditure of Rs. 17,800 in
accordance with the provisions of IAS 38. Assume that tax relief on this expenditure is taken in
full in the period in which it is incurred.
(vi) Entertainment: SSL paid for a large office party during 2017 to celebrate a successful first two
years of the business. This cost Rs. 20,000. Assume that this expenditure is not tax deductible at
all.
(vii) Accounting depreciation Rs. 18,500
Tax depreciation Rs. 24,700
SSL is now subject to higher tax rate of 34%.
Required: For the year ended 31st December 2015, 2016 and 2017:
(a) Calculate the current tax.
(b) Calculate the deferred tax balance that is required in the statement of financial position.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge.
(d) Prepare the statement of profit or loss note which shows the component of the tax expense.
(e) Prepare tax reconciliation in absolute amount.

IQ School of Finance 7
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question 11. [Prior year adjustment]

During the year 2017, following progress is made:
a) An expense of Rs. 100,000 pertaining to tax year 2012 is disallowed by the tax authorities during the
current year, the company intends to file an appeal against the same.
b) An expense of Rs. 150,000 pertaining to tax year 2013 is disallowed by the tax authorities during the
current year, the company does not intend to file any appeal against the same.
c) An expense of Rs. 200,000 pertaining to tax year 2014 was disallowed last year against which an
appeal was filed. During the current year, the decision is granted in favor of the Company.
d) An expense of Rs. 300,000 pertaining to tax year 2015 was disallowed last year against which an
appeal was filed. The decision is granted against the Company. The Company intends to file appeal
at higher level of Courts.
e) An expense of Rs. 250,000 pertaining to tax year 2015 was disallowed last year against which an
appeal was filed. The decision is granted against the Company. The Company does not intend to file
any appeal at higher level of Courts.
Relevant tax rates are as follow:
 Tax year 2012 35%
 Tax year 2013 34%
 Tax year 2014 33%
 Tax year 2015 32%
 Tax year 2016 31%
 Tax year 2017 30%

Required: Journalize the above.

IQ School of Finance 8
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question 12.
ABC Limited purchased a building having a useful life of 10 years for Rs. 1,000,000 on 1 January 2010. It
is the policy of the Company to carry its PPE at revaluation model. Tax authorities allow initial allowance
at the rate of 15% of cost in the first year and tax depreciation at the rate of 10% on WDV (including first
year). The fair values of the building at relevant dates are as follow:

 As on 31 December 2010 Rs. 1,200,000

 As on 31 December 2011 Rs. 950,000
 As on 31 December 2012 Rs. 500,000
 As on 31 December 2013 Rs. 800,000
Required: Journalize the above. Tax rate is 35%.

Question 13. [Equity investments classified at FVOCI with tax] [BDO IFRS IN PRACTICE 2016 – IFRS 9]
Entity X has a 31 December financial year end and pays tax at a rate of 30%. On 1 January 20X3, Entity X
acquires 100 shares of Entity Y for Rs. 10,000.
 On 31 December 20X3, the fair value of the 100 shares Entity Y has declined to Rs. 8,000.
 On 31 March 20X4, Entity X receives a cash dividend of Rs. 500 from Entity Y.
 On 31 December 20X4, the fair value of the 100 shares of Entity Y is Rs. 13,000.
 Subsequent to year end 31 December 20X4, Entity X decides to dispose of the entire investment for
Rs. 13,000.
Required: Journalize the above transaction

Question 14. [ICAP Study Support Material]

On 30 June 2014 Francesca Company had a credit balance on its deferred tax account of Rs. 1,340,600
all in respect of the difference between depreciation and capital allowances.
During the year ended 30 June 2015 the following transactions took place.
(1) Rs. 45 million was charged against profit in respect of depreciation. The tax computation showed
capital allowances of Rs. 50 million.
(2) Interest receivable of Rs. 50,000 was reflected in profit for the period. However, only Rs. 45,000 of
interest was actually received during the year. Interest is not taxed until it is received.
(3) Interest payable of Rs. 32,000 was treated as an expense for the period. However, only Rs. 28,000
of interest was actually paid during the year. Interest is not an allowable expense for tax purposes
until it is paid.
(4) During the year Francesca incurred development costs of Rs. 500,600, which it has capitalised.
Development costs are an allowable expense for tax purposes in the period in which they are paid.
(5) Land and buildings with a net book value of Rs. 4,900,500 were revalued to Rs. 6 million.
The tax rate is 30%.
Required: Show current tax expense, deferred tax expense, deferred tax asset/liability.

IQ School of Finance 9
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question No. 15 [Comprehensive Example]

The following information relates to Apricot Limited (AL), a listed company, for the financial year ended
31 December 2011:
(i) The profit before tax for the year amounted to Rs. 60 million (2010: Rs. 45 million).
(ii) The accounting and tax written down value of fixed assets as on 31 December 2010 was Rs. 95
million and Rs. 90 million respectively. Accounting depreciation for the year is Rs. 10 million (2010:
Rs. 9 million) whereas tax depreciation for the year is Rs. 8 million (2010: Rs. 7 million).
(iii) During the year, AL sold a machine for Rs. 3 million and recognized a profit of Rs. 0.5 million. The
tax written down value of the machine as on 31 December 2010 was Rs. 2 million. There were no
other additions/disposals of fixed assets in 2010 and 2011.
(iv) AL earned capital gain of Rs. 6 million (2010:Nil) on sale of shares of a listed company. This income
is exempt from tax.
(v) Bad debt expenses recognized during the year was Rs. 5 million (2010: Rs. 7 million).
(vi) Bad debts written off during the year amounted to Rs. 3 million (2010: Rs. 4 million).
(vii) Deferred tax liability and provision for bad debts as on 31 December 2009 was Rs. 18.90 million
and Rs. 9 million respectively.
(viii) The company’s assessed brought forward losses up to 31 December 2009 amounted to Rs. 19.25
million.
(ix) Applicable tax rate is 35%.
Required: Prepare a note on taxation for inclusion in AL’s financial statements for the year ended 31
December 2011 giving appropriate disclosures relating to current and deferred tax expenses including
comparative figures for 2010 and a reconciliation to explain the relationship between tax expense and
accounting profit.

IQ School of Finance 10
IAS 12: Income Taxes Compiled by: Murtaza Quaid

Question No. 16 [Comprehensive Example]

Intelligent Technologies Limited (ITL) earned profit before tax amounting to Rs. 11 million, during the year
ended 31 December 2012. The following information is available for calculation of tax liability:
(i) Accounting depreciation for the year is Rs. 30 million, whereas tax depreciation is Rs. 25.6 million.
(ii) The accounting and tax written-down values of the fixed assets as at 31 December 2012 were Rs.
90 million and Rs. 102.4 million respectively.
During the year, ITL realised capital gain of Rs. 2 million on sale of shares of listed companies. This
income is exempt from tax.
(iii) It is expected that taxation authorities would add back expenses amounting to Rs. 0.9 million of
which Rs. 0.5 million would be allowed in 2015.
(iv) During the year, expenses amounting to Rs. 3 million that pertained to year ended 31 December
2011 were disallowed. ITL had initially expected that the entire expense would be allowed but
now has decided not to file an appeal against the decision.
(v) As at 31 December 2011, ITL had assessed brought forward losses of Rs. 21 million.
(vi) Deferred tax asset as on 01 January 2012 amounted to Rs. 10.15 million.
(vii) Applicable tax rate for the company is 35%.
Required: Prepare a note on taxation (expense) for inclusion in ITL’s financial statements for the year
ended 31 December 2012 giving appropriate disclosures relating to current and deferred tax expenses
and a reconciliation to explain the relationship between tax expenses and accounting profit.
(Ignore comparative figures)

IQ School of Finance 11