FIJI NATIONAL UNIVERSITY

COLLEGE OF BUSINESS, HOSPITALITY AND TOURISM STUDIES

DEPARTMENT OF ACCOUNTING
ACC601 CORPORATE ACCOUNTING
SEMESTER 1 – 2021
Tutorial: Topic 4

Accounting for Income Tax

1. Outline the different treatments for accounting and tax purposes of the following items:
(a) Depreciation of non-current assets
(b) Goodwill
(c) Long-service leave payable
(d) Allowance for doubtful debts
(e) Entertainment costs
(f) Prepaid insurance
(g) Warranties liability
(h) Rent received in advance.

2. What are the main principles of tax-effect accounting?

3. Current tax liability in four cases

For each of the four cases, calculate taxable income and prepare the journal entry for current tax
payable. (The tax rate is 30%)

Case 1 Case 2 Case 3 Case 4

Accounting profit (loss) $40000 $20000 $5000 $(10000)

After debiting as expense:
Goodwill impairment * 6000 - - 8000
Entertainment costs * - 6000 7000 -
Donation to political party* 1000 3000 - -
Depreciation of new plant (10%) 4000 2000 10000 2000
Long service leave expense 600 600 600 1200

For tax purposes:

Deprecation rate allowable 20% 20% 20% 20%
Long service leave paid - - - 2400

*these items are non-deductible for tax purpose.

4. Worksheet and adjusting entry for deferred tax

CRADLE LTD
Statement of Financial Position (draft)
as at 30 June 2010
2010 2009
$ $
Assets
Cash 65 000 52 000
Accounts Receivables 885 000 858 000
Allowance for doubtful debts (80 000) (70 000)
Inventory 640 000 749 000
Prepaid insurance 4 000 3 000
Dividends Receivable 36 000 21 000
Plant 1240 000 918 000
Accumulated depreciation-Plant (380 000) (315 000)
Goodwill 78 000 97 500
Shares in listed companies 140 000 110 000
Deferred tax asset ? 87 125
Liabilities
Bank O’draft 209 300 175 500
A/cs payable 191 100 156 000
Current tax liability 50 985 46 270
Div payable 65 000 52 000
Convertible notes - 260 000
LSL payable 137 800 130 000
Def tax liability ? 7 200

Additional information
a) Plant and equipment is depreciated at 20% p.a. straight-line method for accounting
purpose but the allowable rate for taxation is 15% p.a. The plant and equipment sold
originally cost $32500
b) Accumulated depreciation for taxation purpose was $285000 at 30 June 2010.
c) The company taxation rate is 30%
d) Cradle ltd had overestimated its income tax payable for the year ended 30 June 2009 by
$2800. The overprovision was caused by an incorrectly calculated temporary difference
that resulted in the recognition of a deferred tax asset. All necessary adjustments to
correct the overprovision have been posted to the accounting records.

Required:

Determine and record the movements in deferred tax assets and liabilities for Cradle Ltd for the
year ended 30 June 2010 using an appropriate worksheet. Do not net off deferred tax assets and
liabilities.
The End