The document discusses income tax accounting and deferred tax assets and liabilities. It covers temporary and permanent differences between accounting profit and taxable profit, taxable and deductible temporary differences, and examples of calculating deferred tax liabilities and assets. Temporary differences arise when revenue and expenses are recognized in different periods for accounting and tax purposes. Deferred tax liabilities occur when tax bases of assets are lower than carrying amounts, and deferred tax assets occur when tax bases of liabilities are higher than carrying amounts.
The document discusses income tax accounting and deferred tax assets and liabilities. It covers temporary and permanent differences between accounting profit and taxable profit, taxable and deductible temporary differences, and examples of calculating deferred tax liabilities and assets. Temporary differences arise when revenue and expenses are recognized in different periods for accounting and tax purposes. Deferred tax liabilities occur when tax bases of assets are lower than carrying amounts, and deferred tax assets occur when tax bases of liabilities are higher than carrying amounts.
The document discusses income tax accounting and deferred tax assets and liabilities. It covers temporary and permanent differences between accounting profit and taxable profit, taxable and deductible temporary differences, and examples of calculating deferred tax liabilities and assets. Temporary differences arise when revenue and expenses are recognized in different periods for accounting and tax purposes. Deferred tax liabilities occur when tax bases of assets are lower than carrying amounts, and deferred tax assets occur when tax bases of liabilities are higher than carrying amounts.
The document discusses income tax accounting and deferred tax assets and liabilities. It covers temporary and permanent differences between accounting profit and taxable profit, taxable and deductible temporary differences, and examples of calculating deferred tax liabilities and assets. Temporary differences arise when revenue and expenses are recognized in different periods for accounting and tax purposes. Deferred tax liabilities occur when tax bases of assets are lower than carrying amounts, and deferred tax assets occur when tax bases of liabilities are higher than carrying amounts.
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ACC803 Advanced
Financial Reporting
Week 3: Income Tax Accounting
3.1 Tax effect accounting.
3.2 Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL). Introduction Accounting for income taxes -recognizes both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity's assets and liabilities.
Current Tax -Recognize liability for unsettled portion of tax expense. -Recognize an asset to the extent amounts paid exceed amounts due. -Tax loss which can be used against future taxable income can be recognized as an asset (deferred tax asset). The Nature of Income tax Accounting profit is usually different from taxable profit, Because they are determined by different principles and rules. the difference arise from a number of common transactions and may be either permanent or temporary in nature.
Permanent difference- in accounting and tax profit arise when the treatment of a transaction by taxation legislation and accounting standard is such that amount recognized as part of accounting profit are never recognized as part of taxable profit or vice versa. - this includes income never subject to taxation and expenditure incurred by an entity that will never be an allowable deduction. Where such difference exist, taxable profit will never equal accounting profit.
Temporary difference- in accounting and tax profit arise when the period in which revenue and expenses are recognized for accounting purposes is different from the period in which such revenues and expenses are treated as taxable income and allowable deduction for tax purposes. Temporary difference may be either: a) taxable temporary difference - which are temporary difference that will result in taxable amounts in determining taxable profit ( tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. - in simple terms, this means that a deferred tax liability will arise when the carrying value of asset is greater (>) than its tax base or when the carrying amount of the liability is less (<)than its tax base.
b) deductible temporary difference- which are temporary differences that will result in amounts that are deductible in determining profit ( tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
a deferred tax asset may arise.
-when the carrying value of the liability is greater (>) than its tax base or when the carrying value of the asset is less (<) than its tax base,
Asset CA> TB DTL
CA< TB DTA
Liabilities CA<TB DTL
CA> TB DTA Some of the difference between accounting rules and tax rules
item Generally accepted accounting rule Tax Rule
Many accurued expenses (for example, long service leave, warranty costs) An expense when accured Recognised as a tax deduction when paid Many prepaid expense ( for example, Prepaid Intially as asset -expensed when economic rent) benefits used Typically a tax deduction when paid Revenue received in advance (for example, rental Treated as a liability -recognised as revenue when revenue) earned Typically taxed when received Not a tax deduction in current or subsequent Entertainment and goodwill impairment Treated as an expense periods Treated as a tax deduction when debtor is actually Doubtful debts Treated as an expense when recognised written off in subsequent period Development expenditure Often capitalised and subsequently amortised Typically a tax deduction when paid for Example You are provided with the following information of XYZ for the year ended 30th June 2012: Cash sales $100000 COGS 40000 Amount received in advance for services to be performed in August 2012 5000 Rent expense for year ended 30th June 2012 10000 Rent prepaid for 2 months to 31st August 2012 $1000 Doubtful debts expenses $1000 Amount provided in 2012 for employees long service leave entitlements $3000
Required: Calculate taxable profit and accounting profit for the year ending 30 June 2012. Example AN entity acquired plant and equipment for $1 million on Jan 1st 20X9. The assets is depreciated at 25% a year on SLM and tax legislation permits to depreciate the assets at 30% a year for tax purpose. Required: Calculate any DTL that might arise on the plant and equipment at 31/12/x9. Its tax rate is 30%. Example Mc Tavish Limited has the following assets in its balance sheet as at 30 June 2011. Machinery: Acquired at a cost of $400000 on 1st July 2009. It has a useful life for accounting purposes of 5 years and no expected salvage value. Its carrying value at 30th June 2011 therefore is $240000. For tax purpose it can be depreciated at 25% per year. Interest receivable: Has recorded interest receivable ( interest earned but not yet received) at $100000. The Tax authority will not tax the interest until it is received. Account Receivables: Has made sales on credit terms amounting to $80000 and at the end of the reporting period the $80000 is still to be received. The ATO has already included the $80000 in taxable Income.
Required: Determine the respective tax bases of the above items as at 30 June 2011. Calculate the DTL or DTA Example Scott Dillon Limited has following liabilities in its statement of financial position as at 30Th June 2011. Revenue received in advance: The company has received $100000 for interest revenue received in advance. The tax authority taxes the revenue when it is received. Accrued expenses: The company has accrued expenses relating to unpaid salaries amounting to $50000. The amount of the accrual will be deductible when actually paid. Loan Payable: The company has a loan with a carrying value of $40000. The payment of the loan is not deductible. Required: Determine the tax base of Scott Dillon Limited's liabilities. Calculate the DTL or DTA Example Farrelly Limited's statement of financial position shows that a provision for warranty expenses exists with a balance of $10000. All of the provision was created in the current financial year and no amount have been paid. The warranty expense is not deductible until such time as cost associated with the warranty are actually paid. The tax rate is 30%. Required: Determine the balance of the deferred tax asset and provide the relevant journal entries. The following formula is applied to derive the tax base from the carrying amount of the asset: Carrying amount - Future taxable amounts+ Future deductible amount = Tax base
Contains some examples of the calculation of tax bases for assets
Future Future taxable deductible CA amounts amounts Tax Base Prepayments $3000 : fully deductible for tax whe paid 3000 -3000 0 0
Trade receivables $50000 less $2000
allowance for doubtful debts: sales revenue is already included in taxable profit 50000 0 2000 52000 Plant and equipment costing $10000 has a carrying value of $5400: accumulated depreciation at tax rates is $6500 5400 -5400 3500 3500 Loan receivable $25000: Loan repayment wll have not tax consequences 25000 0 0 25000 Interest receivable $1000: recoginsedas revenue but not taxable until received 1000 -1000 0 0 The following formula can be applied to derive the tax base from the carrying amount of the liability Carrying amount + Future taxable amounts- Future deductible amount = Tax base
Future Future taxable deductible CA amounts amounts Tax Base Provision for annual leave $3900: not deductible for tax until paid 3900 0 -3900 0 Trade payables $34000: Expense already deducted from taxable income 34000 0 0 34000 Subscription revenue received in advance $500: Taxed when received. 500 -500 0 0 Loan Payable $20000 : Loan repayment will have no tax consequences 20000 0 0 20000 Accured expense $6700: deductible when paid in cash 6700 0 -6700 0 Accured penalties $700: Not tax deductible 700 0 0 700 Calculation of DTA or DTL
CA of assets or Liabilities - TB of assets or liabilities
= Taxable or Deductible temporary difference * Tax Rate = DTA or DTL
Deferred tax liabilities
Recognise liabilities for all taxable temporary differences
Deferred tax assets
Recognise for deductible temporary differences, unused tax losses, unused tax credits to the extent that taxable profit will be available against which the asset can be used. Example of Worksheet Extract from Accounting Balance Sheet Deductible Taxable Reval. Surplus Income tax temporary temporary Tax expense payable Tax bases differences differences $ $ $ $ $ $ $ Assets Cash 60 000 60 000 Accts re net 50 000 60 000 10 000 (10 000) Prepaid Ins. 20 000 20 000 20 000 Inventory 80 000 80 000 Plantnet 450 000 400 000 50 000 50 000 Land 600 000 400 000 200 000 (200 000)
Tax on taxable income, 30% x $700 000 210 000 210 000 Income tax adjustments 24 000 81 000 207 000 (60 000) 210 000 Practice Question ABC Limited commerce's operations on 1st July 2011 and presents its first statement of comprehensive Income and statement of financial position of 30th June 2012. The statements are prepared before considering taxation. The following information is available: Statement of comprehensive Income for the year ended 30th June 2012.
Gross Profit 730000
Expense Administration expenses 80000 Salaries 200000 Long service leave 20000 Warranty expense 30000 Depreciation expense- Plant 80000 Insurance 20000 430000 Accounting profit before tax 300000 Continued. Assets and Liabilities as disclosed in the statement of financial position as at 30th June 2012 Assets Cash 20000 Inventory 100000 Accounts receivales 100000 Prepaid Insurance 10000 Plant- Cost 400000 Less Accumulated depreciation 80000 320000 Total assets 550000 Liabilities Accounts payable 80000 Provision for warranty expenses 20000 Loan payable 200000 Provision for long servce leave expense 20000 Total Liabilities 320000 Net Assets 230000 Other Information All administration and salaries expense incurred have been paid. It is not deductible until it is actually paid. None of the long service expense has actually been paid. It is not deductible until it is actually paid. Warranty expense were accrued and, at the end, actual payments of $10000 had been made ( leaving an accrued balance of $20000). Deductions are available only when the amounts are paid and not as they are accrued. Insurance was initially prepaid to the amount of $30000. At year end, the unused component of the prepaid insurance amounted to $10000. Actual amounts paid are allowed as a tax deduction. Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. The plant is depreciated over 5 years for accounting purpose but over 4 years for taxation purposes. The tax rate is 30%.
Required: Prepare a worksheet to calculate the end of reporting period adjustment to DTA or DTL account as ta 30th June 2012 and show the necessary journal entries. Readings Week 3 Reading 2 The Reputational Costs of Tax Avoidance Week 3 Reading 3 Determinants of the Accounting Change for Income Tax
