A211 BKAF 3033 FINNACIAL ACCOUNTING AND REPORTING III

MINI CASE 3: DEFERRED TAX

SUBMISSION DATE: 26/12/2021
QUESTION 1

Lynida is a new accountant for Niendra Engineering Bhd. She is concerned about the
company’s income statement that reports income tax expense which is different from the
income tax obligation to the government for the year 2020.

She is also uncertain which differences should be included in the determination of deferred
tax for 2020. Lynida is provided with two items that are relevant to the decision. The first
item is RM70,000 non-tax deductible insurance premium the company pay annually for the
CEO’s life insurance policy for which the company is the beneficiary. The second item is that
Niendra Engineering Bhd purchased a building on 1 January 2020 for RM12,000,000. The
building’s estimated useful life is 10 years from the date of purchase with no salvage value.
Depreciation computed using the straight-line method for financial reporting purposes and
the capital allowance for the building is 30% in the first year including both initial allowance
and annual allowance. Assume tax rate is 24%.

REQUIRED:

(a) Explain why the amount of income tax expense in Niendra Engineering Bhd’s income
statement is not equal with the amount of income tax obligation to the government.

(b) Discuss the difference between temporary and permanent difference. Give ONE (1)
example for temporary and permanent differences based on the information in
Niendra Engineering Bhd.

(c) Calculate the deferred tax as at 31 December 2020 for Niendra Engineering Bhd and
specify whether it is deferred tax assets or deferred tax liability.

(d) Assume that on 31 October 2020, the Malaysian Government enacted that corporate
tax rate is reduced to 21% for year assessment of 2021 onwards. Discuss how this
affects net deferred tax. Calculate the adjusted net deferred tax.

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QUESTION 2

Wawasan 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 2020:
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 2020 was RM8,500. The tax rate for
the assessment year 2020 was 24%.
1. The cost of the property, plant and equipment is RM356,000 when it was acquired in
2018. Depreciation expense for property, plant and equipment is calculated at the rate
of 10%. Initial allowance is 20% and annual allowance is 10%. Both of capital
allowances is calculated based on the cost of the assets.
2. The intangible assets consist of development expenditure of Wawasan Bhd’s R&D
project incurred during the year that was qualified to be capitalised. No amortization
is allocated during the year.
3. Interest receivable is interest revenue earned from the investment in fixed deposit.
4. Meanwhile, interest expense was incurred due to a 10% loan from a financial
institution.
5. Unearned revenue is payment received under a Wawasan 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 Wawasan Bhd and calculate the
temporary difference as of 31 December 2020. Indicate whether the temporary
difference is taxable or deductible.

(a) Compute the deferred tax expenses for 2020.

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(b) Explain the effect on the computation of deferred tax expense if the tax rate for the
assessment year 2020 differs from the tax rate for the assessment year 2019. Calculate
the adjusted deferred tax expense of Wawasan Bhd assuming that the tax rate used in
2019 was 22%.

QUESTION 3

Diandra Bhd recognised a deferred tax liability for the year ended 31 December 2019 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 base was
RM20,000,000.

The following transaction took place during 2020:

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 base 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. Diandra Bhd has recognised income receivable of RM2,000,000 but none has been
received yet.
4. Diandra 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 2019 and 2020 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 2020.

(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 2020.
QUESTION 4 (20 MARKS: 36 MINUTES)

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Futurecare Bhd, which began operation in 2016, sells electrical goods in Malaysia. The
carrying amount of asset and liabilities of Futurecare Bhd as at 31 December 2020 are as
follow:
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 including the following items:
(i) Motor vehicles acquired on 1 January 2019 for RM100,000 with a useful life of 10
years. Initial allowance is 20% and annual allowance is 10% per year.
(ii) Machinery acquired on 1 January 2018 for RM120,000 with a useful life of 12
years. Initial allowance is 20% and annual allowance is 14% per year.
(iii) Futurecare 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 law allows all research and development costs to be
written off immediately in computing taxable profit. Amortization in 2020 was
RM5,000.
3. Interest receivable is interest earned on investment in government bond.
4. Prepaid insurance is payment for 2021 insurance coverage.

5. Penalties payable is related to the fines charged to Futurecare Bhd. for violation of
pollution laws.
6. Interest payable is due to interest payment for 2020 which is not yet paid.
7. Unearned rent is for 2021 rental from investment properties which is received in
advanced.

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8. Futurecare Bhd. provides for warranties on goods sold. In year 2020, none of goods
are returned for repairs.
9. Corporate tax rate for 2020 is 24%.

REQUIRED:
(a) Determine the tax base of asset and liabilities for Futurecare 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 comprehensive
income) for 2020.

(c) Explain the difference between deferred tax assets and deferred tax liabilities.