Singapore Institute of Management UOL International Programme AC2091 Financial Reporting Session 16: Accounting For Taxation Practice Question 1

Singapore Institute of Management
UOL International Programme

AC2091 Financial Reporting
Session 16: Accounting for Taxation
Practice Question 1
Battle Plc has the following projected information:
Year ended 31 Dec Profit before depreciation Capital allowance Depreciation

£ £ £
2007 20,000 6,400 1,280
2008 19,200 1,280 5,120
2009 17,600 1,280 3,840
2010 16,000 8,960 2,560
The tax rate for Battle is 33%. There is no deferred tax balance brought forward as at 1
January 2007.
Required:
(a) Discuss the reasons for and against accounting for deferred taxation. What are the
differences between the flow-through, partial provision and full provision approaches to
accounting for deferred tax?
(b) Explain why permanent differences are not treated in the same way as timing differences
in calculating a deferred tax provision.
(c) Show the tax and deferred tax in the profit and loss accounts and the deferred tax in the
balance sheets for the years 2007 to 2010 under the flow-through and full provision
methods.
(Adapted: UOL 2007 ZB Q4)
Practice Question 1 [ANSWERS]
Current tax computation

2007 2008 2009 2010
£ £ £ £
Profit before depreciation
(less): capital allowance
Taxable profit
Tax @ 33%
Page 1 of 15
Flow-through method
Income Statement (extract) for the year ended 31 December

2007 2008 2009 2010
£ £ £ £
(less): depreciation
Profit before tax
(less): tax expense
Profit after tax
Statement of Financial Position (extract) as at 31 December

2007 2008 2009 2010
£ £ £ £
Current liabilities
Provision for income tax
Full provision method
Deferred tax computation

Year Capital Depreciation Temporary P/L [Expense] DTL/DTA
Allowance Difference
£ £ £ £ £
2007
2008
2009
2010
Page 2 of 15
2007 2008 2009 2010
£ £ £ £ £ £ £ £
Profit before tax
(less): tax expense
Current year tax
Deferred tax
Profit after tax
Page 3 of 15
2007 2008 2009 2010
£ £ £ £
Non-current assets
Deferred tax asset
Non-current liabilities
Deferred tax liability
Current liabilities
Practice Question 2
Mary Plc has the following balance sheets:
31/12/02 31/12/01 31/12/02 31/12/01

£’000 £’000 £’000 £’000
Fixed assets Equity and debt
Industrial buildings 3,200 3,200 £1 NV share capital 3,000 3,000
Plant and equipment 200 300 Retained earnings 750 200
Profit/loss 550 550
Current assets
Other investments 200 200 Current liabilities
Trade debtors 450 275 Trade creditors 150 375
Cash at bank 400 150
4,450 4,125 4,450 4,125
Required:
(a) The plant and equipment had been purchased for £400,000 on 31 December 2000. It had
an expected life of four years, zero residual value and attracted 100% first year
allowances. Current tax rate is 35%. Calculate the current and deferred tax liabilities for
the years ended 31 December 2001 and 2002.
(b) Contrast the flow-through, partial and full provisioning approaches to the accounting
treatment for deferred taxation.
(Adapted: UOL 2004 ZB Q3)
Page 4 of 15

2001 2002
£’000 £’000
Taxable profit
Tax @ 35%

Year Carrying Tax Base Temporary DTL/DTA P/L [Expense]
Amount Difference
£’000 £’000 £’000 £’000 £’000

2001
2002

2001 2001 2002 2002
£’000 £’000 £’000 £’000
Profit before tax
(less): tax expense
Current year tax
Deferred tax
Profit after tax
Page 5 of 15
2001 2002
£’000 £’000
Current liabilities
Practice Question 3
Pear Ltd has the following projected information:
Year ended 31 Dec Profit before depreciation Capital allowance Depreciation

£ £ £
2010 60,000 19,200 3,840
2011 57,600 3,840 7,680
2012 52,800 9,360 11,520
2013 48,000 26,880 7,680
The tax rate for Pear Ltd is 33%.
Required:
(a) Discuss the reasons for and against accounting for deferred taxation. What are the
differences between the flow-through, partial provision and full provision approaches to
accounting for deferred tax?
(b) Show the items for taxation and deferred taxation in the financial statements for Pear Ltd
for the years 2010 to 2013 using:
(i) flow-through and
(ii) full provision bases
(Adapted: UOL 2010 ZA Q5)
Page 6 of 15

2010 2011 2012 2013
£ £ £ £
Taxable profit
Tax @ 33%
Flow-through method

2010 2011 2012 2013
£ £ £ £
Profit before tax
(less): tax expense
Profit after tax

2010 2011 2012 2013
£ £ £ £
Current liabilities
Page 7 of 15
Full provision method

Year Capital Depreciation Temporary P/L [Expense] DTL/DTA
Allowance Difference
£ £ £ £ £
2010
2011
2012
2013

2007 2008 2009 2010
£ £ £ £
Current liabilities
Page 8 of 15
2010 2010 2011 2011 2012 2012 2010 2010
£ £ £ £ £ £ £ £
Profit before tax
(less): tax expense
Current year tax
Deferred tax
Profit after tax
Page 9 of 15
Practice Question 4
Thomas Ltd [“Thomas”] reported a profit before tax of $5,000,000 for the year ended 30 June
2013.
Additional information
(i) On 1 July 2010, Thomas purchased equipment at a cost of $4,500,000. For accounting
purposes, the equipment is depreciated on a straight line basis over 9 years, with zero
residual value. For income tax purposes, the equipment is depreciated 15% on cost per
annum.
(ii) For the year ended 30 June 2012, Thomas earned interest income of $55,000, which
had not been received as at the year-end. There had not been any interest receivable as
at the beginning of the year. During the financial year ended 30 June 2013, it earned
$78,000 interest income and received cash of $60,000. Under accounting rules, interest
income is recognised when earned whereas under tax rules, it is taxable when received.
(iii) On 30 June 2012, the balance of the accrued wages account was $170,000. During the
year ended 30 June 2013, Thomas incurred wages expense of $4,400,000, and paid
wages of $4,450,000. For income tax purposes, wages are deductible when paid.
(iv) On 30 June 2013, Thomas recognised a goodwill impairment loss expense of $85,000.
For income tax purposes, goodwill impairment losses are not tax deductible.
(v) The corporate income tax rate is 30%. The deferred tax liability balance as at 30 June
2011 was $52,500.
Required:
(a) Calculate taxable/deductible temporary differences and associated deferred tax liabilities/
assets at 30 June 2012 and 2013. Show all workings necessary in deriving your answers.
(b) Calculate taxable income and tax payable for year ended 30 June 2013. Show all
workings necessary in deriving your answer.
(c) Prepare the journal entry for Thomas Ltd, to record income tax for the year ending 30
June 2013, in accordance with IAS 12: Income Taxes. Show all workings necessary to in
deriving your answer.
Page 10 of 15
(a)
Item Carrying Tax Base Temporary DTL/DTA P/L
Amount Difference
$ $ $ $ $
Year ended 30 Jun 2012
(i) Equipment
Cost $4,500k 4,500
Depn/CA for
[4,5m-0]/9 x2 4,5m x 15% x2
2011 to 2012
= $100k =675 x 2 = 1,350k
NBV/TWDV 4,5m -100k 3,5m - 3,15m

4,5m - 1,350k
as at 30/6/12 = 350k
= $3,500k = 3,150k
taxable
(ii) Interest 0+55k -0 =55k 55k +0 -55k 55k-0 =55k

Receivable open+ins-ending =0 taxable
(ii) Accrued 170k 170k-170k =0 170k - 0 = 170k

Wages deductible
350k + 55k – 235k X 30%
230k x 30%
70.5k –
70,5k - 52,5k
350k + 55k - 170k
170k = 235k = 70,500 52.5k
= 235k taxable = 70,500 = 18,000
Taxable DTL = 18,000
taxable expense
Expense
Year ended 30 Jun 2013

(i) Equipment
NBV/TWDV 350k 3,150k
as at 30/6/12
Depn/CA for 675k
500k
2013
NBV/TWDV 2,375k 3m - 2,475k
3000k
as at 30/6/13 = 525k taxable
(ii) Interest 55k + 78k - 60k 0 73k - 0 = 73k

Receivable
=73k taxable
(iii) Accrued 170k + 4,4m - 4,45m 120k - 0 = 120k

Wages 0
= 120k
2,475k + 73k - 120k 478k x 30% 143,4- 70,5k

= 478k taxable = 143,400 =72,900
expense
Page 11 of 15
Note:
- Tax base calculation
o Asset = Carrying amt + Future deductible amt - taxable economic benefits
o Liability = Carrying amt – Future deductible amt + taxable economic benefits
(b)
$
Profit before tax 5m
Add: Non-deductible expenses
Depreciation 500k
Interest received 60k
Wages expense 4,400k
Goodwill impairment 85k

(Less): Deductions
Capital allowance (675k)
Interest earned (78k)

Wages paid (4,450k)
Taxable income 4,842k
Tax @ 30% 1,452,600
(c)
Dr ($) Cr ($)
Income tax expense 1,525,500
[ 1,452,600 + 72,900 ]
Deferred tax liability 72,900
Provision for income tax 1,452,600
check: [PBT +/- permanent difference] x tax rate = [5m + 85k] x 30% = 1525,00
Practice Question 5
Vines Ltd (“Vines”) operates a chain of wine shops and has generated an accounting profit of
$500,000 for the current financial year ended 30 September 2016. The company’s financial
statements for the current year were authorized for issue by its board of directors on 26
January 2017.
The following transactions were highlighted during the preparation of the financial
statements for the current year:
(i) On 1 October 2015, the company purchased display cabinets for $180,000. The
company depreciates the full cost of its furniture on a straight-line basis over 5 years
with no residual value. Accelerated capital allowance on furniture is granted over 3
years for tax purposes.
(ii) Earned rental income of $48,000 from the company’s property in Malaysia, relating to
the period of February to September 2016, was received in October 2016. This has
been accrued in the books of the company as at 30 September 2016. For tax purposes,
such foreign-sourced income is taxable upon receipt.
Page 12 of 15
(iii) The company was fined and paid $30,000 for violating fire safety regulations in its
warehouse. Fines are not tax deductible.
Required:
Compute the current tax expense and deferred tax expense for the year ended 30 September
2016, assuming that there are no other relevant items for the computation of tax expenses.
The corporate tax rate applicable for the current year is 20%. There were no outstanding
balances for deferred tax as at 1 October 2015.
Taxable income for the year ended 30 September 2016

=
=
Current tax expense for the year ended 30 September 2016

=
=

Amount Difference
$ $ $ $ $
(i) Furniture
Cost
Depn/CA for
2011 to 2012
NBV/TWDV
as at 30/6/12
(ii) Rental
Receivable
Deferred tax expense for the year ended 30 September 2016

=
Total tax expense for the year ended 30 September 2016

=
Page 13 of 15
Practice Question 6
Brooker Limited (Brooker), a manufacturer of sports apparel and equipment in Country X,

reported a net profit before tax of $1.6 million for the financial year ended 30 June 20x6.
On 1 July 20x5, Brooker purchased new production equipment for $240,000. The company
depreciated the equipment with no residual value on a straight-line basis over its useful life of
five years. For tax purposes, the equipment is eligible for capital allowances claimable in
equal instalments over three years.
Brooker recognised dividend income of $50,000 from its overseas investments in Country Y
in the year ended 30 June 20x6. The dividends were received in August 20x6. Assume that
under the tax rules in Country X, foreign–sourced dividend income is tax-exempt.
On 1 July 20x5, Brooker had an interest receivable balance of $60,000. For the financial year
ended 30 June 20x6, the company earned $105,000 in interest income and collected cash of
$70,000 for interest receivable. Assume that under the tax rules in Country X, interest income
is taxable when received.
Based on its prior experience, Brooker provided for $90,000 of warranty expense for the year
ended 30 June 20x6. For tax purposes, the warranty expense would be deductible only upon
actual costs incurred to service any claims. At year-end, Brooker had not received any
warranty claims from its customers for goods sold.
On 30 June 20x6, Brooker recognised a goodwill impairment expense of $205,000. Goodwill

impairments are not deductible for tax purposes in Country X.
The net deferred tax liability as at 1 July 20x5 was $10,200. Brooker had not accounted for
any current or deferred tax for the financial year ended 30 June 20x6. The prevailing tax rate
in Country X is 17%.
Assume that Brooker was subject to income tax only in Country X, which had only one tax
authority. Further assume that the applicable accounting standard on income taxes in Country
X is the same as Singapore Financial Reporting Standard (FRS) 12 Income Taxes.
Required:
a) Compute Brooker’s taxable profit and current tax (expense) for the financial year ended
30 June 20x6. Show all necessary workings.
b) Calculate the taxable and deductible temporary differences, as well as the balance of net
deferred tax account as at 30 June 20x6. Show all necessary workings.
(Adapted: PFF Dec 2016)
Page 14 of 15
a)
$ $
Profit before tax
Add:
(Less):
Taxable income
Tax @ 17%
b)

Amount Difference
Equipment
Interest
receivable
Warranty
payable
Page 15 of 15

Singapore Institute of Management UOL International Programme AC2091 Financial Reporting Session 16: Accounting For Taxation Practice Question 1

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UOL International Programme

Battle Plc has the following projected information:

Year ended 31 Dec Profit before depreciation Capital allowance Depreciation

Practice Question 1 [ANSWERS]

Current tax computation

(less): capital allowance

Income Statement (extract) for the year ended 31 December

Profit before tax

(less): tax expense

Profit after tax

Statement of Financial Position (extract) as at 31 December

Provision for income tax

Full provision method

Deferred tax computation

Profit before tax

(less): tax expense

Current year tax

Profit after tax

Deferred tax asset

Deferred tax liability

Provision for income tax

Mary Plc has the following balance sheets:

31/12/02 31/12/01 31/12/02 31/12/01

Current tax computation

(less): capital allowance

Deferred tax computation

£’000 £’000 £’000 £’000 £’000

Income Statement (extract) for the year ended 31 December

(less): tax expense

Current year tax

Profit after tax

Deferred tax liability

Provision for income tax

Pear Ltd has the following projected information:

Year ended 31 Dec Profit before depreciation Capital allowance Depreciation

The tax rate for Pear Ltd is 33%.

(Adapted: UOL 2010 ZA Q5)

Current tax computation

(less): capital allowance

Income Statement (extract) for the year ended 31 December

Profit before tax

(less): tax expense

Profit after tax

Statement of Financial Position (extract) as at 31 December

Provision for income tax

Deferred tax computation

Statement of Financial Position (extract) as at 31 December

Deferred tax liability

Provision for income tax

Profit before tax

(less): tax expense

Current year tax

Profit after tax

NBV/TWDV 4,5m -100k 3,5m - 3,15m

(ii) Interest 0+55k -0 =55k 55k +0 -55k 55k-0 =55k

(ii) Accrued 170k 170k-170k =0 170k - 0 = 170k

Year ended 30 Jun 2013

(ii) Interest 55k + 78k - 60k 0 73k - 0 = 73k

(iii) Accrued 170k + 4,4m - 4,45m 120k - 0 = 120k

2,475k + 73k - 120k 478k x 30% 143,4- 70,5k

Goodwill impairment 85k