worksheet and entries for current and deferred tax

FIND A SOLUTION AT Academic Writers Bay

QUESTION 4.3
Current tax worksheet and entries for current and deferred tax (LO3, 5)
At 30 June 2020, Jessica Ltd had the following deferred tax balances:
Deferred tax liability
Deferred tax asset
$ 3600
3000
Jessica Ltd recorded a profit before tax of $160 000 for the year to 30 June 2021, which
included the following items:
Depreciation expense – plant
Doubtful debts expense
$ 14000
16000
Long-service leave expense
8000
For taxation purposes the following amounts are allowable deductions for the year to 30
June 2021:
Tax depreciation – plant
Bad debts written off
$ 20000
4000
              Depreciation rates for taxation purposes are higher than for accounting purposes. A
corporate tax rate of 30% applies.
Required
A. Prepare a current tax worksheet to determine the taxable income for the year to 30
June 2021.
B. Determine by what amount the balances of the deferred liability and deferred tax asset
will increase or decrease for the year to 30 June 2021 because of depreciation, doubtful
debts and long-service leave.
C. Prepare the journal entries of Jessica Ltd to account for income tax assuming
recognition criteria are satisfied.
D. What are the balances of the deferred tax liability and deferred tax asset at 30 June
2021?
PART A.
Current Tax Worksheet
Profit before income tax
Add:
Depreciation expense – plant
Doubtful debts expense
Long service leave expense
Deduct:
Tax depreciation – plant
Bad debts written off
Taxable income
Current tax liability at 30%
$ 160 000
38 000
$ 14 000
16 000
8 000
198 000
(24 000)
(20 000)
(4 000)
174 000
$ 52 200
Journal entry for current tax
Income Tax Expense
Current Tax Liability
Dr
Cr
52 200
52 200
PART B.
Depreciation and Written Down Values (WDV)
The carrying amount of plant (accounts WDV) will exceed the tax base of plant (tax WDV)
when tax depreciation is at recognised using higher rates than accounting depreciation. This
gives rise to
 taxable temporary difference = carrying amount of plant – tax base of plant
 deferred tax liability = tax rate x taxable temporary difference
The amount of the taxable temporary difference and the related deferred tax liability (DTL)
change over time. The deferred tax liability increases when the difference between the
accounts WDV and tax WDV is increasing, that is, when tax depreciation is greater than
depreciation expense.
 DTL increase
= 30% x (increase in difference between accounts and tax WDV
= 30% x (tax depreciation – depreciation expense)
= 30% x ($20 000 – $14 000)
= $1800
The deferred tax liability decreases when tax depreciation is less than depreciation expense.
Assume plant has an opening written down value of $72 000 for accounts and $60 000 for tax.
The opening taxable temporary difference is $12 000 [$72 000 – $60 000]. The opening balance
of the related DTL is $3600 [30% x $12 000]. The tax effect of depreciation for the year to 30
June 2021 is as follows:
Accounting
Tax
Taxable Temp
Difference
Plant (WDV) 1 July 2020
Less: Depreciation for the year
Plant (WDV) 30 June 2021
72 000
(14 000)
58 000
60 000
(20 000)
40 000
18 000
DTL 30 June 2021 (30%)
Less: DTL 1 July 2020 (30%)
5 400
3 600
Increase in DTL for the year
1 800
Journal entry
Income Tax Expense
Deferred Tax Liability
Dr
Cr
1 800
1 800
Bad and doubtful debts
The carrying amount of accounts receivable (the net book value) will be less than the tax base
of accounts receivable when an allowance for doubtful debts is recognised. This gives rise to:
 deductible temporary difference = tax base of receivables – carrying amount of receivables
 deferred tax asset = tax rate x deductible temporary difference
The amount of the deductible temporary difference and the related deferred tax asset (DTA)
change over time as the allowance for doubtful debts increases or decreases. The deferred tax
asset will increase when the allowance increases, that is, when doubtful debts expense is greater
than bad debts written off.
 DTA increase
= 30% x (increase in allowance)
= 30% x (doubtful debts expense – bad debts written off)
= 30% x ($16 000 – $4 000)
= $3 600
The deferred tax asset will decrease when the allowance decreases.
Assume accounts receivable has an opening book value of $50 000 and tax value of $60 000.
The opening deductible temporary difference is $10 000 [$60 000 – $50 000]. The opening
balance of the related DTA is $3000 [30% x $10 000]. The tax effect of bad and doubtful debts
for the year to 30 June 2021 is as follows:
Accounting
Tax Deductible Temp
Difference
Accounts receivable (net) 1 July 2020
Less: Doubtful expense/bad debts
Accounts receivable (net) 30 June 2021
50 000
(16 000)
34 000
60 000
(4 000)
56 000
22 000
DTA 30 June 2021 (30%)
Less: DTA 1 July 2020 (30%)
6 600
3 000
Increase in DTA for the year
3 600
Journal entry
Deferred Tax Asset
Income Tax Expense
Dr
Cr
3 600
3 600
Long service leave
The carrying amount of the provision for long service leave (LSL) will be greater than the tax
base ($Nil) when long service expense is recognised. This gives rise to:
 deductible temporary difference = carrying amount of provision
 deferred tax asset = tax rate x deductible temporary difference
The amount of the deductible temporary difference and the related deferred tax asset (DTA)
will change over time as the provision for LSL increases or decreases. The deferred tax asset
will increase when the provision for LSL increases, that is, when long service expense is greater
than long service leave paid.
 DTA increase
= 30% x (increase in provision)
= 30% x (long service leave expense – long service leave paid)
= 30% x ($8 000 – $0)
= $2 400
The deferred tax asset will decrease when the provision for LSL decreases.
Assume the provision for LSL has an opening book value of $0 and there is no opening
deductible temporary difference or related DTA.
The tax effect of long service leave (LSL) for the year to 30 June 2021 is as follows:
Accounting
Tax Deductible Temp
Difference
Provision for LSL 1 July 2020
Add: Long service leave expense/paid

8 000


Provision for LSL 30 June 2021
8 000

8 000
DTA 30 June 2021 (30%)
Less: DTA 1 July 2020 (30%)
2400

Increase in DTA for the year
2 400
Journal entry
Deferred Tax Asset
Income Tax Expense
Dr
Cr
2 400
2 400
PART C.
From the solution for requirements A and B.
Journal entry for current tax
Income Tax Expense
Current Tax Liability
Dr
Cr
52 200
52 200
Journal entry for deferred tax
Deferred Tax Asset
Deferred Tax Liability
Income Tax Expense
Dr
Cr
6 000
1 800
4 200
Additional explanations
 The deferred tax asset entry of $6000 relates to both the allowance and provision for LSL
[$3600 + $2400]
 The entries can be combined into a single entry for income tax as follows:
Income Tax Expense
Deferred Tax Asset
Deferred Tax Liability
Current Tax Liability
Dr
Dr
Cr
Cr
48 000
6 000
1 800
52 200
 AASB 112/IAS 12 requires a note disclosure explaining the composition of income tax
expense as follows:
Current tax
Deferred tax from origination and reversal of
temporary differences
Income Tax expense
$52 500
(4 200)
48 000
PART D.
Deferred Tax Liability
$
30/06/21 Carried forward 5 400
5 400
$
1/07/20 Brought forward 3 600
Income tax expense 1 800
5 400
1/07/21 Brought forward 5 400
Deferred Tax Asset
$
1/07/20 Brought forward 3 000
Income tax expense 6 000
9 000
1/07/21 Brought forward 9 000
$
30/06/21
Carried forward 9 000
9 000
Additional explanations
 The temporary differences and related deferred tax balances at 30 June 2021 are:
Taxable Temporary
Differences
Deductible Temporary
Differences
Accounts receivable 22 000
Plant 18 000
Provision for LSL 8 000
Total temporary differences 18 000 30 000
Deferred tax asset at 30% 5 400
Deferred tax liability at 30% 9 000
QUESTION 4.5
Tax bases and adjusting entries for deferred tax (LO7, 8)
Embry Ltd is reviewing its deferred tax for the year. In each of the following situations
prepare the end-of-period adjustment journal entries to account for income tax on the
origination or reversal of any temporary differences. Explain in each case why particular
accounts are affected.
1. Embry Ltd purchased a depreciable asset at the beginning of the year for $200 000.
For accounting purposes, an annual depreciation rate of 20% straight-line is used,
whereas for taxation the rate is 30% straight-line.
2. Embry Ltd’s provision for long-service leave equals $150 000 at the beginning of the
year and $180 000 at the end of the year. During the year, long-service leave of $20 000
was pad.
3. In calculating taxable income, Embry Ltd has deducted $100 000 of development
expenditure incurred on the first day of the year. For accounting purposes, the
$100 000 has been capitalised as an asset and is amortised on a straight-line basis over
5 years. The company is not entitled to a tax deduction of 125% of costs incurred.
4. Embry Ltd has an allowance for doubtful debts of $90 000 at the end of the year. The
balance of the allowance account at the beginning of the year was $40 000. During the
year, $10 000 was written off as being uncollectable. The gross amount of accounts
receivable equals $620 000 at the beginning of the year and $600 000 at the end of the
year.
5. Embry Ltd has interest receivable of $19 000 at the end of the year. No interest was
receivable at the beginning of the year. Interest income is included in taxable profit
only when received.
6. Embry Ltd revalued land at the end of the year. The land was revalued from its original
cost of $570 000 to its fair value of $1 000 000.
7. Embry acquired plant for $400 000 at the beginning of the year and revalued it at the
end of the year to $500 000. The plant is being depreciated at the rate of 10% per year
for accounting purposes and 20% per year for tax purposes.
8. Embry Ltd has goodwill of $250 000 at the end of the year. The goodwill has a tax base
of $Nil.
Refer to Figure 4.14 on the calculation of deferred tax balances after calculating the tax
bases of an asset and a liability as follows:
Tax base of an asset
Taxable economic benefits from recovery Deductible amount in future [1]
No taxable economic benefits from recovery Carrying amount [2]
Tax base of a liability
Labilities except unearned revenue Carrying amount – Deductible amount in future [1]
Unearned revenue Carrying amount – Untaxed future revenue [2]
1. Depreciable asset
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Plant (net) 160 000 140 000 140 000 [1] 20 000
DTL ending (30%) 6 000
DTL beginning (30%) 0
Increase in DTL (30%) 6 000
Journal entry
Income Tax Expense
Deferred Tax Liability
Dr
Cr
6 000
6 000
Additional explanations
 The tax deduction for depreciation is $60 000 but the depreciation expense is $40 000. As
the deduction exceeds the expense, taxable profit is lower than accounting profit. Tax
depreciation is usually greater than depreciation expense in the early years of an asset’s life
because of accelerated depreciation rates for tax. This results in the origination of a taxable
temporary difference and deferred tax liability as the asset is expected to generate taxable
profits in the future. When the asset is fully depreciated for tax purposes, the depreciation
expense will be greater than tax depreciation and the taxable temporary difference and
deferred tax liability will reverse.
 Tax effect of depreciation
Depreciation – accounts = Cost x depn rate for accounts = $200 000 x 20% = $40 000
Depreciation – tax
Tax effect
 Carrying amount
= Cost x depn rate for tax = $200 000 x 30% = $60 000
= 30% x ($60 000 – $40 00) = $6 000
Accounts written down value = Cost – Accumulated depreciation based on 20% rate
= $200 000 – $40 000 = $160 000
 Tax base for asset with taxable economic benefits from recovery [1]
Future deductible
amount
= Tax written down value
= Cost – Accumulated depreciation based on 30% rate
= $200 000 – $60 000 = $140 000
 Temporary difference for depreciable asset
Taxable temporary difference = Carrying amount – Tax base
– ending = $160 000 – $140 000 = $20 000
– beginning = $0
2. Provision for long service leave
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Provision for
LSL
180 000 180 000 180 000
[1]
180 000
DTA ending (30%)
DTA beginning (30%)
Increase in DTA
54 000
(45 000)
9 000
Journal entry
Deferred Tax Asset
Income Tax Expense
Dr
Cr
9 000
9 000
Additional explanations
 Long service leave is accrued in the accounting records before being paid. Tax deductions
are available only on payment of long service leave. The provision for LSL increases with
LSL expense and decreases with LSL paid. The provision for LSL increased by $30 000
during the year [=$180 000 – $150 000]. Hence, LSL expense is $50 000 or $30 000 greater
than LSL paid [=$30 000 + $20 000].
 When the provision for LSL increases, the LSL expense is greater than the LS paid and the
accounting profit must be reduced by the increase in the LSL to determine the taxable profit.
The increase in the provision for LSL increases the deferred tax asset because there is a
future tax benefit when deductions for LSL are claimed.
 Tax effect of provision
Increase
Increase
= Ending balance – Beginning balance = $180 000 – $150 000 = $30 000
= LSL expense – LSL paid = $50 000 – $20 000 = $30 000
Tax effect
= 30% x $30 000 = $9000
 Tax base for liability except unearned revenue [1]
Carrying amount – Future deductible
= $180 000 – $180 000 = $0
amount
 Temporary difference for provision liability
Deductible temporary difference = Carrying amount – Tax base
– ending
= $180 000 – $0 = $180 000
– beginning = $150 000 – $0 = $150 000
3. Development asset
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Development
asset (net)
80 000 0 0 [1] 80 000
DTL ending (30%)
DTL beginning (30%)
24 000

Increase in DTL
24 000
Journal entry
Income Tax Expense
Deferred Tax Liability
Dr
Cr
24 000
24 000
Additional explanations
 The tax deduction for the development costs is $100 00. The costs are recognised as an asset
for accounting purposes and amortised over time. The development costs asset increases
with costs incurred and decreases with amortisation. The development asset increased by
$80 000 during the year from costs incurred are $100 000 and amortisation of $20 000. When
the tax deduction exceeds the accounting expense for the development costs. It is anticipated
that future taxable amounts will emanate from the development asset and result in future
taxes being paid. Hence a deferred tax liability is recognised.
 Tax effect of development costs
Increase
Increase
= Ending balance – Beginning balance = $80 000 – $0 = $80 000
= Costs capitalised – Amortisation
= $100 000 – (20% x $100 000) = $80 000
= 30% x $80 000 = $24 000
Tax effect
 Carrying amount
Accounts WDV = Cost – Accumulated amortisation
= $200 000 – $20 000 = $180 000
 Tax base for asset with taxable economic benefits from recovery [1]
Future deductible
amount
= Costs incurred claimable in future = $0
 Temporary difference for development asset
Taxable temporary difference = Carrying amount – Tax base
– ending = $80 000 – $0 = $80 000
– beginning = $0
4. Accounts receivable
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Accounts
Receivable
(net)
510 000 0 600 000 [2] 90 000
DTA ending (30%)
DTA beginning (30%)
Increase in DTA
27 000
(12 000)
15 000
Journal entry
Deferred Tax Asset
Income Tax Expense
Dr
Cr
15 000
15 000
Additional explanations
 Doubtful debts expense is recognised for accounting purposes but not tax purposes. Only debts
written off are tax deductible. When the allowance increases over a period, the doubtful debts
expense is greater than bad debts written off. Accounting profit must be reduced by the
increase in the allowance to determine the taxable profit. The allowance increased by $50
000 during the year [=$90 000 – $40 000]. Hence, the doubtful debts expense is $60 000 or $50
000 greater than bad debts written off [=$10 000 + $50 000]. The increase in the allowance
increases the deferred tax asset because there is a future tax benefit from tax deductions when
bad debts are written off the allowance.
 Tax effect of allowance
Increase
Increase
Tax effect
 Carrying amount
= Ending balance – Beginning balance = $90 000 – $40 000 = $50 000
= Expense – Bad debts written off = $60 000 – $10 000 = $50 000
= 30% x $50 000 = $15 000
Net book value
= Accounts receivable (gross) – Allowance
= $600 000 – $90 000 = $510 000
 Tax base for asset with no taxable economic benefits from recovery [2]
Carrying amount (gross) = Tax written down value = $600 000
 Temporary difference for accounts receivable (net)
Deductible temporary difference = Tax base – Carrying amount
– ending = $600 000 – $510 000 = $90 000
– beginning = $620 000 – $580 000 = $40 000
5. Interest receivable
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Interest
receivable
19 000 0 0 [1] 19 000
DTL ending (30%)
DTL beginning (30%)
5 700

Increase in DTL (30%)
5 700
Journal entry
Income Tax Expense
Deferred Tax Liability
Dr
Cr
5 700
5 700
Additional explanations
 Interest received is subject to tax rather than interest revenue. When interest receivable
increases over a period, interest revenue is greater than interest received. Accounting profit
must be reduced by the increase in interest receivable to determine the taxable profit. Interest
receivable increased by $19 000 during the year [=$19 000 – $0]. Hence, interest revenue
is $19 000 greater than interest received. Interest receivable results in the recognition of a
deferred tax liability because in a future period the interest will be received and subject to
tax.
.
 Tax effect of interest receivable
Increase
Increase
Tax effect
= Ending balance – Beginning balance = $19 000 – $0 = $19 000
= Interest revenue – Interest received
= 30% x $19 000 = $5700
 Tax base for asset with taxable economic benefits from recovery [1]
Future deductible
amount
= Costs incurred claimable in future = $0
 Temporary difference for interest receivable
Taxable temporary difference = Carrying amount – Tax base
– ending = $19 000 – $0 = $19 000
– beginning = $0
6. Revalued land
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Land – at
valuation
1 000 000 570 000 570 000 [1] 430 000
DTL ending (30%)
DTL beginning (30%)
129 000

Increase in DTL (30%)
129 000
Journal entry
Tax on Revaluation Gain (OCI)
Deferred Tax Liability
Dr
Cr
129 000
129 000
Additional explanations
 Revaluation gains on land are included in other comprehensive income but are not
recognised as income for tax purposes. Only realised gains from sale written off are tax
deductible. Revaluation gains from land do not affect the calculation of current tax because
they are not included in either accounting profit or taxable profit. Revaluation gains on land
do however impact on deferred tax. The land has a carrying amount of $1 000 000 or $430
000 greater than its original cost [$1 000 000 – $570 000]. If the revalued amount of the land
is recovered in future this will give rise to a capital gain of $430 000 for taxation purposes
and increase the taxable profit and tax paid. Hence, the revaluation of the land above its
original cost results in the recognition of a deferred tax liability. The deferred tax on
revaluation gains is recognised together with the revaluation gain in other comprehensive
income.
 Tax effect of revalued land
Increase
Increase
Tax effect
= After revaluation – Before revaluation = $1 000 000 – $570 000
= Revaluation gain = $430 000
= 30% x $430 000 = $129 000
 Tax base for asset with taxable economic benefits from recovery [1]
Future deductible
amount
= Costs incurred claimable in future = $570 000
 Temporary difference for interest receivable
Taxable temporary difference = Carrying amount – Tax base
– ending = $1 000 000 – $570 000 = $430 000
– beginning = $0
7. Revalued plant
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Plant – at
value (net)
500 000 320 000 320 000 [1] 180 000
DTL ending (30%)
DTL beginning (30%)
54 000

Increase in DTL (30%)
54 000
Journal entry
Tax on Revaluation Gain (OCI)
Income Tax Expense
Deferred Tax Liability
Dr
Dr
Cr
42 000
12 000
54 000
Additional explanations
 In the case of revalued plant there are two factors that explain the difference between the
carrying amount of plant and its tax base: (1) the revaluation gain included in other
comprehensive income, and (2) the difference between tax depreciation and accounts
depreciation.
 The plant has a cost of $400 000 and a book value after depreciation but before the
revaluation of $360 000 [=$400 000 – $40 000]. The revaluation of the plant to $500 000
results in a revaluation gain of $140 000 [$500 000 – $360 000] after accumulated
depreciation is offset against cost. The revaluation gain increases the deferred tax liability of
$42 000 [30% x $140 000] because if the gain is realised in future it will increase taxable
profit. The revaluation gain is included in other comprehensive income and so too must the
tax on the revaluation gain.
 The plant depreciation for accounts is based on the gross amount of the asset for accounts
and accounting depreciation rates whereas depreciation for tax is based on cost and tax
depreciation rates. The depreciation for accounts is $400 000 [=$400 000 x 10%]. The
depreciation for tax is $80 000 [=$400 000 x 20%].
 Tax effect of revalued plant
Increase
Increase
Tax effect
= After revaluation – Before revaluation = $500 000 – $360 000
= Revaluation gain = $140 000
= 30% x $140 000 = $42 000
 Tax effect of depreciation
Depreciation – accounts = Gross x depn rate for accounts = $400 000 x 10% = $40 000
Depreciation – tax
Tax effect
 Carrying amount
= Cost x depn rate for tax = $400 000 x 20% = $80 000
= 30% x ($80 000 – $40 000) = $12 000
Accounts written down value = Gross amount – Accumulated depreciation
= $500 000 – $0 = $500 000
 Tax base for revalued plant with taxable economic benefits from recovery [1]
Future deductible
amount
= Tax written down value
= Cost – Accumulated depreciation based on 20% rate
= $400 000 – $80 000 = $320 000
 Temporary difference for revalued plant
Taxable temporary difference = Carrying amount – Tax base
– ending = $500 000 – $320 000 = $180 000
– beginning = $0
 Assuming the plant is not revalued in the next period, the deferred tax will be as follows:
Carrying
Amount
Future
Deductible
Amount
Tax
Base
Taxable
Temporary
Difference
Deductible
Temporary
Difference
Plant – at
value (net)
444 444 240 000 240 000 [1] 204 444
DTL ending (30%)
DTL beginning (30%)
Increase in DTL (30%)
61 333
(54 000)
7 333
– Depreciation expense $55 556 [=$500 000 x 1/9 years]
– Tax depreciation $80 000 [=$360 000 x 1/9 years]
– Carrying amount $444 444 [= $500 000 – $55 556]
– Tax base $240 000 [=$400 000 – (2 x $80 000)]
Income Tax Expense
Dr
7 333
Deferred Tax Liability
Cr
7 333
8. Goodwill
Deferred tax worksheet (extract)
Carrying
Future
Tax
Taxable
Deductible
Amount
Deductible
Base
Temporary
Temporary
Amount
Difference
Difference
Goodwill
250 000
Excluded temporary
difference
(250 000)

Additional explanations
 Goodwill is an excluded taxable temporary difference by virtue of paragraph 15 of AASB
112/IAS 12 otherwise it would result in the recognition of a deferred tax liability.
 Goodwill can be shown in a deferred tax worksheet as shown above or it can be ignored
altogether when preparing the deferred tax worksheet.
QUESTION 4.8
Deferred tax worksheets and tax entries (LO5, 6, 7, 8)
Victoria Ltd commenced operations on 1 July 2019. Extracts from the statements of
financial position of Victoria Ltd as at 30 June 2021 and 30 June 2020 are as follows:
VICTORIA LTD
Statement of Financial Position
as at 30 June
2021 2020
Assets
Cash
$ 65000 $ 52000
Accounts receivable
Allowance for doubtful debts
Inventory
Prepaid insurance
Dividends receivable
Plant and equipment – at cost
Accumulated depreciation – plant and
equipment
Goodwill
Shares in listed companies at cost
Deferred tax asset
Liabilities
Bank overdraft
Accounts payable
Current tax liability
Provision for employee benefits
Provision for dividend
Borrowings
Deferred tax liability
885000
(80000)
640000
40000
36000
1240000
858000
(70000)
749000
30000
21000
918000
(380000) (315000)
78000
140000
?
78000
110000
60000
209300
191100
50985
137800
65000

?
175500
156000
46270
130000
52000
260000
28800
Additional information
(a) Accumulated depreciation based on tax depreciation is $485 000 at 30 June 2021 and
$360 000 at 30 June 2020. There have been no disposals of plant during the year to 30
June 2021.
(b) Deferred tax liabilities and assets are not netted off in the statement of financial
position.
(c) The corporate tax rate is 30%.
Required
A. Prepare the deferred tax worksheet at 30 June 2020 to prove that the deferred tax
liability and asset balances are $28 800 and $60 000 respectively.
B. Prepare the deferred tax worksheet at 30 June 2021 to determine the deferred tax
entries for the year.
C. Assume that Victoria Ltd made a profit before tax of $800 000 for the year to 30 June
2021 and that the differences between accounting profit and taxable profit are
apparent from items shown in the statement of financial position and its comparative.
Prepare the condensed current tax worksheet for the year to 30 June 2021 and the
current tax entries for the year.
PART A
Deferred Tax Worksheet as at 30 June 2020
Carrying
Amount
Deductible
Amount
Tax Base
Taxable
Temp
Diffs
Deductible
Temp
Diffs
$
52 000
788 000
749 000
30 000
21 000
603 000
78 000
110 000
175 500
156 000
46 270
130 000
52 000
260 000
$


749 000


558 000

110 000



130 000


$
52 000
858 000
749 000


558 000

110 000
175 500
156 000
46 270

52 000
260 000
$
30 000
21 000
45 000
78 000
$
70 000
130 000
Assets
Cash
A/cs Receivable
Inventory
Prepaid insurance
Dividend receivable
Plant & equipment
Goodwill
Shares in other
companies
Liabilities
Bank overdraft
A/cs payable
Current tax liability
Provision for
employee benefits
Provision for
dividend
Borrowings
Total
Excluded differences
Temporary diffs
for deferred tax
DTL (30%)
DTA (30%)
[2]
[2]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
174 000
200 000
78 000

96 000
200 000
28 800
60 000
Additional explanations
 Carrying amounts of assets are net of contra assets, e.g., allowance for doubtful debts,
accumulated depreciation – plant.
 Plant and equipment WDV for tax purposes is $558 000 [=$918 000 – $360 000]
 Tax bases:
– Assets that generate future taxable economic benefits: [1] Tax Base = Future deductible amount
– Assets that do not generate future taxable economic benefits: [2] Tax Base = Carrying amount
– Liabilities [1] Tax Base = Carrying amount less Future deductible amount
PART B
Deferred Tax Worksheet as at 30 June 2021
Carrying
Amount
Deductible
Amount
Tax Base
Taxable
Temp
Diffs
Deductible
Temp
Diffs
$
65 000
805 000
640 000
40 000
36 000
860 000
78 000
140 000
209 300
191 100
50 985
137 800
65 000
$


64 000


755 000

140 000



137 800

$
65 000
885 000
640 000


755 000

140 000
209 300
191 100
50 985

65 000
$
40 000
36 000
105 000
78 000
$
80 000
137 800
Assets
Cash
A/cs Receivable
Inventory
Prepaid insurance
Dividend receivable
Plant & equip
Goodwill
Shares in
other companies
Liabilities
Bank overdraft
A/cs payable
Current tax liability
Provision for
employee benefits
Provision
for dividend
Total
Excluded differences
Temporary diffs for
deferred tax
DTL(30%)
DTA (30%)
Beginning balances
Increase for year
[2]
[2]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[1]
259 000
217 800
78 000

181 000
217 800
54 300
(28 800)
65 340
(60 000)
25 500
5 340
Journal entry for deferred tax
Income Tax Expense
Deferred Tax Asset
Deferred Tax Liability
Dr
Dr
Cr
20 160
5 340
25 500
Additional explanations
 Carrying amounts of assets are net of contra assets, e.g., allowance for doubtful debts,
accumulated depreciation – plant.
 Plant and equipment WDV for tax purposes is $755 000 [=$1 240 000 – $485 000]
 Tax bases:
– Assets that generate future taxable economic benefits: [1] Tax Base = Future deductible amount
– Assets that do not generate future taxable economic benefits: [2] Tax Base = Carrying amount
– Liabilities [1] Tax Base = Carrying amount less Future deductible amount
 The deferred tax worksheets shown in the solution are comprehensive because all assets and
liabilities are included. We would still get the same answer if we did not include assets and
liabilities in the deferred tax worksheet that do not have any future tax consequences. The
assets and liabilities without future tax consequences are:
– Cash
– Inventory
– Goodwill (an excluded temporary difference)
– Shares in listed companies
– Bank overdraft
– Accounts payable
– Current tax liability
– Provision for dividend
– Borrowings
 The increase in the deferred tax asset for 2020-2021 is attributable to the following
Increase in provision for employee benefits
Increase in allowance for doubtful debts
7 800
10 000
17 800 x 30% = $5 340
 The increase in the deferred tax liability for 2020-21 is attributable to the following:
Increase in prepaid insurance
Increase in dividends receivable
Increase in the accounts over tax
written down value of plant
10 000
15 000
60 000
85 000 x 30% = $25 500
 The increase in accounts over tax written down value of plant is calculated as:
Accounting
Tax
Difference
Plant WDV 2021
Plant WDV 2020
860 000
603 000
755 000
558 000
105 000
45 000
Increase
60 000
PART C
Current Tax Worksheet (Condensed)
for the year ended 30 June 2021
Accounting profit
Add:
Depreciation expense – plant & equipment
Increase in allowance for doubtful debts
Increase in provision for employee benefits
Less:
Tax depreciation – plant & equipment
Increase in prepaid insurance
Increase in dividends receivable
Taxable profit
Current tax liability at 30%
$800,000
82 800
(150 000)
65 000
10 000
7 800
(125 000)
(10 000)
(15 000)
732 800
$219 840
Journal entry for current tax
Income Tax Expense
Current Tax Liability
Dr
Cr
219 840
219 840
Additional explanations
 Depreciation expense $65 000 [=$380 000 – $315 000].
 Tax depreciation $125 000 [=$485 000 – $360 000].
 Increase in allowance for doubtful debts  Doubtful debts expense > Bad debts written off
 Add back the increase $10 000 [=$80 000 – $70 000].
 Increase in provision for employee benefits  Benefits expense > Benefits paid
 Add back the increase $7800 [$137 800 – $130 000]
 Increase in prepaid insurance  Insurance paid > Insurance expense
 Deduct the increase $10 000 [$40 000 – $30 000]
 Increase in dividends receivable  Dividend revenue > Dividends received
 Deduct the increase $15 000 [=$36 000 – $21 000]
QUESTION 4.13
Current and deferred tax worksheets, carried forward tax loss and tax entries (LO5, 6,
7, 8, 9, 11)
The financial statements of Eric Ltd for the year ended 30 June 2021 show a profit before
tax of $22 750, included the following items of income and expense:
Government grant (exempt from tax)
Proceeds on sale of plant
Carrying amount of plant sold
Impairment of goodwill
Bad debts expense
Depreciation expense – plant
Insurance expense
Long-service leave expense
$
5 000
23 000
20 000
11 100
8 100
14 000
12 900
14 500
The statements of financial position of Eric Ltd at 30 June 2021 and 30 June 2020 include
the following assets and liabilities:
ERIC LTD
Statement of Financial Position (Extract)
as at 30 June
2021 2020
Assets
Cash $ 6  000 $ 18  000
Accounts receivable 96  000 85  000
Allowance for doubtful debts (6  800) (5  200)
Prepaid insurance 3  400 5  600
Plant 140  000 170  000
Accumulated depreciation – plant (32  000) (28  000)
Goodwill 22  200 22  200
Accumulated impairment losses (11  100) —
Deferred tax asset ? 9  540
Liabilities
Accounts payable 78  000 76  000
Provision for long‐service leave 13  200 9  700
Current tax liability ? —
Deferred tax liability ? 3  780
Additional information
(a) For tax purposes the carrying amount of plant sold was $15 000.
(b)The tax deduction for plant depreciation was $20 250. The accumulated depreciation
on plant for tax purposes at 30 June 2021 is $40 250 (2020: $35 000).
(c) In the year ended 30 June 2020, the company recorded a tax loss. At 1 July 2020 carry
forward tax losses amounted to $16 900. The company recognised a deferred tax asset
in respect of these tax losses at 30 June 2020.
(d)Tax losses carried forward must be offset against any exempt income before being
used to reduce taxable income.
(e) The company does not set off deferred tax liabilities and assets and the corporate tax
rate is 30%.
Required
A. Prepare the current tax worksheet of Eric Ltd for the year ended 30 June 2021 and
the applicable tax entries.
B. Discuss the factors Eric Ltd should consider before recognising a deferred tax asset
with respect to the tax loss incurred in the year ended 30 June 2020?
C. Prepare the deferred tax worksheet of Eric Ltd as at 30 June 2021 and the applicable
tax entries.
D. Discuss whether Eric Ltd should set off deferred tax liabilities and assets based on the
requirements of AASB 112/IAS 12.
PART A
Current Tax Worksheet
for the year ended 30 June 2021
Profit before tax
Add:
Impairment of goodwill (non-deductible)
Depreciation expense – plant
Gain on sale of plant (tax)
Bad debts expense
Long service leave expense
Insurance expense
Deduct:
Grant revenue (exempt)
Tax depreciation – plant
Gain on sale of plant (accounts)
Bad debts written off
Long service leave paid
Insurance paid
Taxable income
Add:
Exempt income
Deduct:
Carried forward tax losses recouped
Taxable income subject to tax
Current tax liability at 30%
$22 750
68 600
$11 100
14 000
8 000
8 100
14 500
12 900
91 350
(56 450)
(5 000)
(20 250)
(3 000)
(6 500)
(11 000)
(10 700)
34 900
5 000
39 900
(16 900)
23 000
$6 900
Journal entry for current tax
Income Tax Expense
Deferred Tax Asset
Current Tax Liability
Dr
Cr
Cr
11 970
5 070
6 900
Additional explanations
 Reduction in deferred tax asset $16 900[= 30% x $5 070]

Gain/loss on sale of plant
Accounting
$ 23 000
20 000
$ 3 000
Taxation
$ 23 000
15 000
$ 8 000
Proceeds on sale
Carrying amount
Gain (loss)
 Long service leave paid
Provision for Long Service Leave
$
30/06/21
$
Leave paid 11 000 1/07/20 Beginning balance 9 700
Ending balance 13 200 Leave Expense 14 500
24 200 24 200
 Bad Debts written off
Allowance for Doubtful Debts
$
Bad debts write off 6 500
30/6/21 Ending balance 6 800
13 300
$
1/07/20
Beginning balance 5 200
Bad Debt Expense 8 100
13 300
 Insurance Paid
Prepaid Insurance
$
1/07/20
$
Beginning balance 5 600 Insurance expense 12 900
Insurance paid 10 700 30/6/21 Ending balance 3 400
16 300 16 300
Condensed Current Tax Worksheet
for the year ended 30 June 2021
Profit before tax
Add:
Impairment of goodwill (non-deductible)
Depreciation expense – plant
Gain on sale of plant (tax)
Increase in allowance for doubtful debts
Increase in provision for long service leave
Decrease in prepaid insurance
Deduct:
Grant revenue (exempt)
Tax depreciation – plant
Gain on sale of plant (accounts)
Taxable income
Add:
Exempt income
Deduct:
Carried forward tax losses recouped
Taxable income subject to tax
Current tax liability at 30%
$22 750
40 400
$11 100
14 000
8 000
1 600
3 500
2 200
63 150
28 250
(5 000)
(20 250)
(3 000)
34 900
5 000
39 900
(16 900)
23 000
$6 900
PART B
Recognition of deferred tax asset for tax losses
In completing the financial statements for 30 June 2020, the directors of Eric Ltd and its
auditors should have considered whether there were sufficient grounds to form the view that
company would probably earn taxable profits of at least $16 900 in future financial years.
AASB 112/IAS 12 (para. 34) states that a deferred tax asset arising from carrying forward
unused tax losses must be recognised to the extent that it is probable that future taxable profit
will be available against which the unused tax losses can be utilised
PART C
Deferred Tax Worksheet
as at 30 June 2021
Carrying
Amount
Deductible
Amount
Tax Base
Taxable
Temp
Diffs
Deductible
Temp
Diffs
$
6 000
89 200
3 400
108 000
11 100
78 000
13 200
$



99 750


13 200
$
6 000
96 000

99 750

78 000

$
3 400
8 250
11 100
$
6 800
13 200
Assets
Cash
A/cs Receivable
Prepaid insurance
Plant
Goodwill
Liabilities
A/cs payable
Provision for LSL
Total temporary
differences
Excluded diff –
Goodwill
Temp differences
for deferred tax
DTL ending (30%)
DTA ending (30%)
DTA/DTL
beginning
Other adjustments –
tax losses used
[2]
[2]
[1]
[1]
[1]
[1]
[1]
22 750
20 000
(11 100)

11 650
20 000
3 495
(3 780)
6 000
(9 540)
5 070
Increase/
(Decrease)
(285)
1 530
Journal entry for deferred tax
Deferred Tax Liability
Deferred Tax Asset
Income Tax Expense
Dr
Dr
Cr
285
1 530
1 815
Additional explanations
 Carrying amounts of assets are net of contra assets.
– Accounts receivable $89 200 [ =$96 000 – $6800]
– Plant $108 000 [=$140 000 – $32 000]
– Goodwill $11 100 [=$22 200 – $11 100]
 Tax bases
– Assets that generate future taxable economic benefits:[1] Tax Base = Future deductible amount
– Assets that do not generate future taxable economic benefits: [2] Tax Base = Carrying amount
– Liabilities:[1] Tax Base = Carrying amount less Future deductible amount
 The plant WDV for accounts and tax are calculated as follows:
Accounting
Tax
Difference
Plant – at cost
Accumulated depn
Plant WDV 30/6/21
140 000
(32 000)
108 000
140 000
(40 250)
99 750
8 250
Plant – at cost
Accumulated depn
Plant WDV 30/6/20
170 000
(28 000)
142 000
170 000
(35 000)
135 000
7 000
Increase
1 250
 The increase in the deferred tax asset for 2020-2021 is attributable to the following:
Increase in allowance for doubtful debts
Increase in provision for long service leave
1 600
3 500
5 100 x 30% = $1530
 The decrease in the deferred tax liability for 2020-2021 is attributable to the following:
Decrease in prepaid insurance
(2 200)
Increase in accounts over tax WDV of plant 1 250
( 950) x 30% = ($285)
 T accounts for deferred tax at 30
June 2021.
DTL
DTA
ITE
285
1/7/20
3 780
1/7/20
9 540
ITE
5 070
30/6/21 3 495
ITE 1 530
11
070
30/6/21 6 000
3 780
3 780
11 070
PART D
Offset of deferred tax asset and deferred tax liability
Journal entry for offsetting deferred tax balances at 30 June 2021
Deferred Tax Liability
Deferred Tax Asset
Dr
Cr
3 495
3 495
Additional explanations
 Eric Ltd appears to meet the conditions for offsetting deferred tax assets and liabilities set
out at paragraph 74 of AASB 112/IAS 12 because:
(a) It should have a legally enforceable right to set off current tax liabilities with current
tax assets from the Australian Tax Office
(b) The deferred tax assets and deferred tax liabilities relate to income taxes levied by the
same taxation authority, that is the ATO, and also relate to the same taxable entity.
 When offsetting deferred tax balance, the idea is to take the lower balance and offset it
against the higher balance. In this example, the DTL of $3495 is offset against the DTA of
$6000. The statement of financial position of Eric Ltd at 30 June 20121 would then show a
deferred tax asset of $2 505 [=$6000 – $3495].

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