BKAR3033 FINANCIAL ACCOUNTING AND REPORTING III (A192)

MINI CASE - DEFERRED TAX

SUBMISSION DATE: 13 May 2020

QUESTION 1

Sufi Bhd (Sufi) is a technology startup company, incorporated in Malaysia since year 2014.
The company involves in providing information technology (IT) solutions and services. Sufi
reported profit of RM42,000 for the financial year 2016. The following information are
extracted from the financial accounting record of Sufi for the year ended 31 December 2016.

1. An IT equipment was bought in January 2014 for RM280,000. The company charged
depreciation at a rate of 20% per annum.

2. A research and development cost amounted to RM25,000 incurred during year 2016
and qualified to be treated as intangible asset.

3. An interest revenue from investment in bond amounted to RM12,500 was earned

during the year, but the amount is receivable in year 2017.

4. An entertainment expense of RM18,000 was paid to entertain new clients.

5. An interest expense amounted to RM29,200 was incurred due to borrowing from

bank. Half of the amount is payable in year 2017.

6. A donation of RM5,000 was made to IRB approved charity fund organized by the
local community during the year.

It is required by Malaysian law that each corporations must file in their income tax return
form and compute tax payable to Inland Revenue Board (IRB) every year. Under tax rule, the
equipment entitled capital allowance at a rate of 30% in the first year of operation and 10% in
the remaining years. Given that tax rate applicable for year assessment 2016 is 25%.

REQUIRED:

(a) Identify whether there is any difference between accounting rule and tax rule in each
of the above situation. If the difference exists, state whether the difference is
temporary or permanent.

(b) Compute deferred tax asset and deferred tax liability (if any) for each of the above
situation.

(c) Determine the amount of tax payable to IRB for year assessment 2016. Prepare the
necessary journal entry.

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QUESTION 2

Cergas Bhd is one of the main manufacturers and suppliers of industrial chemical products
and equipment that had been incorporated in 2001. The following is the carrying amount of
asset and liabilities of the company as at 31 December 2017:

Carrying amount (RM)

Property, plant and equipment 249,200
Intangible assets 138,000
Investment in fixed deposit 107,000
Account receivable 96,700
Interest receivable 10,700
Inventory 206,000
Bank 129,000
Trade payables 197,000
Accrued interest 15,600
Penalties payable 15,500
Unearned revenue 45,300
10% Loan 156,000

Additional information:
1. The balance of deferred tax liability on 1 January 2017 was RM8,500. The tax rate for
the assessment year 2017 was 24%.
2. The cost of the property, plant and equipment is RM356,000 when it was acquired in
2015. Depreciation expense for property, plant and equipment is calculated at the rate
of 10% per year and capital allowance is 20% per year for the first three years from
the cost of the assets.
3. The intangible assets consist of development expenditure of Cergas Bhd’s R&D
project incurred during the year that was qualified to be capitalised.
4. Interest receivable is interest revenue earned from the investment in fixed deposit.
5. Meanwhile, interest expense was incurred due to a 10% loan from a financial
institution.
6. Unearned revenue is payment received under a Cergas Bhd’s policy that require new
clients to make advance payments before the delivery of goods is made to them.

REQUIRED:
(a) Determine the tax base of asset and liabilities for Cergas Bhd and calculate the
temporary difference as at 31 December 2017. Indicate whether the temporary
difference is taxable or deductible.
(b) Compute the deferred tax expenses for 2017.
(c) Explain the effect on the computation of deferred tax expense if the tax rate for the
assessment year 2017 differs from the tax rate for the assessment year 2016. Calculate
the adjusted deferred tax expense of Cergas Bhd assuming that the tax rate used in
2016 was 22%.

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QUESTION 3

Fatihah Bhd, which began operation in 2016, sells electrical goods in Malaysia. The
carrying amount of asset and liabilities of Fatihah Bhd as at 31 December 2018 are as follow:
Accounts Carrying Amount (RM)
Property, plant and equipment 170,000
Investment properties 50,000
Research and development 30,000
Accounts receivable 20,000
Prepaid insurance 5,000
Inventory 20,000
Bank 40,000
Interest receivable 8,000
Interest payable 3,000
Penalties payable 20,500
Provision for warranties 18,000
Deferred tax payable as at 1 January 5,000
Unearned rent 16,000

Additional information:
1. Property, plant and equipment includes the following items:
(i) Motor vehicles acquired on 1 January 2017 for RM100,000 with a useful life of 10
years. Capital allowance is 30% per year for the first two years.
(ii) Machinery acquired on 1 January 2016 for RM120,000 with a useful life of 12
years. Capital allowance is 25% per year for the first three years.
(iii) Fatihah Bhd uses straight line method to calculate depreciation expense
for property, plant and equipment.
2. Research and development refers to development cost that was capitalized in 2018
and being amortised. Current tax laws allows all research and development costs to
be written off immediately in computing taxable profit.
3. Interest receivable is interest earned on investment in government bond.
4. Penalties payable is related to the fines charged to Fatihah Bhd for violation of
pollution laws.
5. Unearned rent is for 2019 rental from investment properties which received in advanced.
6. Fatihah Bhd provides warranties on goods sold. In year 2018, none of goods are
returned for repairs.
7. Corporate tax rate for 2018 is 24%.
REQUIRED:
(a) Determine the tax base of asset and liabilities for Fatihah Bhd and calculate the
temporary difference by specifying whether the differences are deductible temporary
differences or taxable temporary differences.
(b) Calculate the deferred tax expense (amount charged in the statement of profit or loss
and other comprehensive income) for 2018.

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QUESTION 4

Dragon Lord Bhd recognised a deferred tax liability for the year ended 31 December 2017
which is related solely to a difference between rates of capital allowance and depreciation.
The carrying amount of plant and equipment was RM30,000,000 and tax written down value
was RM20,000,000.

The following transaction took place during 2018:

1. During the year, plant was revalued and surplus was RM6,000,000. At the end of the
year, the carrying amount of plant was RM42,000,000 and tax written down was
RM25,000,000. Gains on revaluation are taxable on sale at 20%.
2. Development expenditure of RM12,000,000 was capitalised in accordance with MFRS
138 but is deducted for tax purpose. There was no amortisation during the year.
3. Dragon Lord Bhd has recognised income receivable of RM2,000,000 but none has been
received yet.
4. Dragon Lord Bhd has made provision for environment clean-up of RM1,000,000. The
expenditure will be tax deductible when paid only.
5. The trade receivables were disclosed at RM3,500,000 after providing for doubtful debts
of RM250,000.
6. The tax payable for the year was calculated at RM3,300,000.
7. Corporate tax rate for 2017 and 2018 were 24%.

REQUIRED:

(a) Prepare a table showing the carrying amounts tax base and temporary differences for
each of the items as at 31 December 2018.

(b) Calculate the amount of tax expense as charged in the Statement of Profit or Loss and
Other Comprehensive Income and the amount disclosed in the deferred tax liability in
the Statement of Financial Position as at 31 December 2018.