RMIT FR Week 2 Solutions PDF

Financial Reporting
RMIT Review Session 2
Theashen Vandiar CA CPA

Question 1 - Flower Ltd
Flower Ltd’s income statement indicated a profit before tax of $300,000.
The following relates to the calculation of profit before tax:
1. Fixed asset with a cost of $80,000 is depreciated for accounting
purposes at 20% but 25% for tax purposes.
2. Income received in advance is $3,000.
3. Entertainment expenses of $5,000 were incurred during the year.
Only 50% of this is deductible for tax purposes.
4. A non-deductible fine of $1,000 was expensed.
5. Incomes and expenses are taxed on the cash basis.
a) What is the non-temporary difference?

The ‘number 1’ principle
We need to be able to
adjust the accounting profit
to get the taxable profit.
Income Accounting Profit Taxable Profit Difference
Sales $2,540,000 $2,540,000 $0 We must also account for
Expenses the differences.
Cost of Goods sold ($1,735,000) ($1,735,000) $0
Depreciation - equipment ($12,000) ($14,000) ($2,000)
Other expenses ($40,000) ($37,000) $3,000 Module 4 shows us how.
Profit before tax $753,000 $754,000 $1,000
Accounting Taxable
profit profit
The ‘number 1’ principle
$754,000 x 30% = $226,200
Current Taxable
Tax rate
Tax profit
Income Accounting Profit Taxable Profit Difference

Sales $2,540,000 $2,540,000 $0
Expenses
Taxable Accounting
Cost of Goods sold ($1,735,000) ($1,735,000) $0
Depreciation - equipment ($12,000) ($14,000) profit
($2,000) profit
Other expenses ($40,000) ($37,000) $3,000
Profit before tax $753,000 $754,000 $1,000
$753,000 x 30% = WRONG!!

1. Fixed asset with a cost of $80,000 is depreciated for accounting Temporary
2. Income received in advance is $3,000. Temporary
3. Entertainment expenses of $5,000 were incurred during the year. $5,000 x 50% = $2,500
4. A non-deductible fine of $1,000 was expensed. $1,000 non-temporary
$2,500 + $1,000 = $3,500

1. Fixed asset with a cost of $80,000 is depreciated for accounting
2. Income received in advance is $3,000.
3. Entertainment expenses of $5,000 were incurred during the year.
4. A non-deductible fine of $1,000 was expensed.
b) What is current tax expense?

Question 1b – Flower Ltd
We start with accounting

profit – and adjust for
differences to get
‘Taxable Profit’
There is $4,000 more

depreciation for tax So, less tax is payable now, but
The higher 'tax depreciation' will
purposes than for more will be paid later. This will
reduce the Taxable Profit by $4,000.
Accounting purposes. lead to a DTL (we cover this later)
This is not included in But for tax purposes it is recognised

The journal entry is:
accounting profit now. So tax is paid on this now (but
DR Cash at Bank
(it is a liability that has not is not paid later when it is earned,
CR Unearned Revenue (Liability)
been earned yet) which leads to a DTA)
Only half of the

entertainment is So Taxable Profit is increased by
deductible for tax $2,500.
purposes.
Calculation of taxable profit
Step 1: start with

accounting profit
before tax
Do NOT give rise to

Non-temporary
Deferred Tax
Step 2: adjust for

Calculation of taxable differences between
profit accounting and tax
treatment
DOES give rise to
Temporary
Deferred Tax
Step 3: do the
calculation
Current tax
Current Taxable
Tax rate
Tax profit
Taxable Accounting
profit profit
Income tax – the big picture
Temporary difference
Accounting profit
Taxable income adjusted for diff tax
treatment
Non- temporary
Current tax
difference
X Tax rate
Normal accounting
Tax expense Carrying Amount
treatment
Temporary difference Asset = CA + FD - FT
Deferred tax
X Tax rate Tax base Liability = CA – FD + FT

Differentiating
DTA from DTL
Income received in
advance = CA– income
not taxed in future
Question 2 - Barber Ltd
Barber Ltd received income of $3,000 in advance from its loyal

customers for the year ended 20X1.
20% of this amount was included in the calculation of taxable
profit.
a) What is the tax base?

profit.
a) What is the tax base?
For Accounting Purposes: $3,000 liability
Zero recognised in Accounting Profit.
For Tax Purposes: 20% or $600 is

recognised in Taxable Profit.
So, $2,400 is the Tax Base. This is the
amount remaining that will be Taxable
later.
Question 2 - Barber Ltd - Deferred tax
CA TB TD DT
Opening
balance
Movement
Closing
balance
Question 2 - Barber Ltd - Determining DTA and DTL
Asset Liability
Carrying amount > tax base DTL DTA
Carrying amount < tax base DTA DTL
Carrying amount = tax base None None
Source: International Accounting Standards Committee 1994, Income

Taxes, Background Paper, IASC, para. 21. (CPA Study guide, Table 4.1)

profit.
b) What is the Deferred Tax?
CA TB TD DT
Balance 3,000 2,400 600
CR balance =
deductible TD
CA TB TD DT
Balance 3,000 2,400 600 180
DTA 180
Question 3 - Farmer Brown
Farmer Brown purchased a tractor that cost 120 000.

It is depreciated over 5 years for accounting
purposes but over 4 years for tax purposes.
What is the deferred tax in year 1?
Tractor cost $120,000. Depreciation: Accounting purposes 5 years. Tax purposes 4 years.
CA TB TD DT
Opening 120 000 120 000 0 0

balance
Movement
Closing
balance
CA TB TD DT
Opening 120 000 120 000 0 0

balance
Movement (24 000) 120 000 /

5 years
Closing
balance
CA TB TD DT
Opening 120 000 120 000 0 0

balance
120 000 /
Movement (24 000) (30 000)
4 years
Closing
balance
CA TB TD DT
Opening 120 000 120 000 0 0

balance
Movement (24 000) (30 000) 6 000

DR = DTL
Closing
balance
Farmer Brown
CA TB TD DT
DTL
movement
Opening 120 000 120 000 0 0
balance
Movement (24 000) (30 000) 6 000 1 800

DTL
balance
Closing 96 000 90 000 6 000 1 800
balance
CA TB TD DT
Opening 120 000 120 000 0 0

balance
Movement (24 000) (30 000) 6 000 1 800
Closing 96 000 90 000 6 000 1 800

balance
Dr DT expense 1800
Cr DTL 1800
Question 4 – Entity C
Entity C had the following on it Statement of Financial Position as at 31 December 20X1:
Warranty obligation 5,000
NOTES:
The warranty obligation is expected to reverse in full in 20X2. Tax is calculated on a cash basis. At the end of
20X1, management was only able to confirm the probability of earning $2,000 of taxable profit in 20X2.
a. What is the tax base for the warranty obligation?

b. What is the deferred tax relating to the warranty obligation?
c. What is the amount of deferred tax that can be recognised in 20X1?
d. What is the journal entry for the amount calculated in part c?
a. What is the tax base for the warranty obligation?
Tax base = CA – future deductions + future taxable amounts

= 5,000 – 5000 + 0
=0
b. What is the deferred tax relating to the warranty obligation?
CA TB TD DT
5,000 0 5,000 1,500 DTA

c. What is the amount of deferred tax that can be recognised in 20X1?
Therefore DTA that will

be recognised is $600.
5,000 (2,000 x 30%)
deductible
temporary 2,000 meets
difference probability
criterion
d. What is the journal entry for the amount calculated in part c?
DR Deferred tax asset (B/s) 600

CR Deferred tax income (I/s) 600
Question 5 – Zebra Ltd
Deferred tax journal entries flowchart
Dr Deferred tax
Taxable temporary expense
DTL
differences Cr Deferred tax
liability
Deferred tax journals

Dr DTA
Deductible temporary
income
DTA
Dr Deferred tax
Dr DTA
Recognise Recoupment expense
Cr Current tax income
Cr DTA
Unused tax losses

Dr Deferred tax
Unrecognised Recoupment expense
a. What is the deferred tax liability for 20x1?
DTL = Taxable temporary difference x tax rate

= 4,000 x 30%
= 1,200
b. What is the journal entry for the

deferred tax asset that will be recognized in
20x1?

20x1?
$7,000 Tax Loss x 30% = $2,100 DTA
But, other than the TTD of $4,000 it is

not probably there will further profits
7,000 tax loss


20x1?
$7,000 Tax Loss x 30% = $2,100 DTA
But, other than the TTD of $4,000 it is

not probably there will further profits
7,000 tax loss So you can only recognise this to the

4,000 taxable value of the TTD ($4,000 x 30%)
temporary diff

20x1?
7,000 tax loss

4,000 taxable
temporary diff

20x1?
So $900 of DTA is not recognised
7,000 tax loss

4,000 taxable DR DTA 1,200
temporary diff CR Current tax income 1,200

20x1?
7,000 tax loss

4,000 taxable DR DTA 1,200
temporary diff CR Current tax income 1,200
c. What are the journal entries for the

recoupment of tax losses in 20x2?
Recoupment of tax losses
Very important rule:

When you recoup tax losses:
First allocate the recoupment to tax

losses for which there was NO DTA
recognised.


recognised.
Then allocate the remainder to tax

losses for which DTA has been
recognised.

7,000 tax loss

4,000 taxable
temporary diff

3,000 tax loss

unrecognized
7,000 tax loss

4,000 tax loss
recognized
Dr Deferred tax
DTL
liability

Dr DTA
income
DTA
Dr Deferred tax
Dr DTA
Cr DTA
Unused tax losses

Dr Deferred tax
Question 6 – Entity S
S purchased a tractor for $20,000 on 1 January 20X1. The tractor is depreciated over 5 years
for accounting purposes. For tax purposes, the tractor is depreciated at a rate of 25 per cent.
The CGT cost base of the tractor is $22,000.
On 31 December 20X1, the tractor was revalued to $23,000.
a) What is the deferred tax balance on 31 December PRIOR to the revaluation adjustment?
b) What is the tax base of the tractor AFTER the revaluation adjustment if management
intend to continue using the asset?
c) What would be the tax base if management intended to sell the tractor and capital gains
tax is applicable?
CA TB TD DT
1 Jan 20X1 20,000 20,000 0 0
Dep (20X1) (4,000) (5,000) 1,000 300 DTL
31 Dec 20X1 PRIOR to REVAL 16,000 15,000 1,000 300 DTL
 300 DTL
Tax base = CA + future deductions – future taxable amounts

CA = 23,000
Future deductions = Tax cost – accumulated tax depreciation = 20,000 – 5,000 = 15,000
Future taxable amount = the full revalued amount = 23,000
So if we substitute this into the formula:
Tax base = 23,000 + 15,000 – 23,000 = 15,000
c) What would be the tax base if management intended to sell the tractor and capital gains
tax is applicable?

CA = 23,000
Future deductions = CGT cost base – accumulated tax depreciation = 22,000 – 5,000 = 17,000
Tax base = 23,000 + 17,000 – 23,000 = 17,000
Question 7 – Entity O
Entity O purchased a crane for $250,000 on 1 January 20X1. The crane has a
useful life of 25 years for accounting purposes but 20 years for tax purposes.
The CGT cost base is $260,000.
On 31 December 20X3, the crane was revalued to $270,000.
a) What is the tax base of the revalued crane on 31 December 20X3 if

management intend to sell the crane but capital gains tax is not applicable?
b) What is the final deferred tax balance relating to the crane on 31 December
20X3 if management intend to sell the crane and capital gains tax is applicable?
Question 7(a) – Entity O

CA TB TD DT
1 Jan 20X1 250,000 250,000 0 0
Dep (20X1) (10,000) (12,500) 2,500 750 DTL
Dep (20X2) (10,000) (12,500) 2,500 750 DTL
Dep (20X3) (10,000) (12,500) 2,500 750 DTL
31 Dec 20X3 PRIOR to REVAL 220,000 212,500 7,500 2,250 DTL

Question 7(a) – Entity O


CA = 270,000
Future deductions = Tax cost – accumulated tax depreciation
= 250,000 – 37,500 (see table above for three years of tax depreciation) = 212,500
Future taxable amount = the full revalued amount but LIMITED to cost = 250,000
Tax base = 270,000 + 212,500 – 250,000 = 232,500
Question 7(b) – Entity O
b) What is the final deferred tax balance relating to the crane on 31 December 20X3
if management intend to sell the crane and capital gains tax is applicable?

CA = 270,000
Future deductions = CGT cost base – accumulated tax depreciation = 260,000 – 37,500 = 222,500
Tax base = 270,000 + 222,500 – 270,000 = 222,500
At 31 Dec 20X3: CA = $270,000 and TB = $222,500. Timing Difference = $47,500.
So, the final deferred tax balance would be: $47,500 x 30% = $14,250 DTL.
Question 8 – Entity W
Entity W owns a piece of land which is purchased for $200,000 in 20X1. It uses the land as a golf course. In
20X5, the land was revalued to $250,000. The tax rate applicable for sale is 25% while the rate applicable for
continued use is 30%. Management intend to continue using the land.
What is the deferred tax relating to the revaluation in 20X5?
Question 8 – Entity W
Entity W owns a piece of land which is purchased for $200,000 in 20X1. It uses the land as a golf course. In
20X5, the land was revalued to $250,000. The tax rate applicable for sale is 25% while the rate applicable for
continued use is 30%. Management intend to continue using the land.
What is the deferred tax relating to the revaluation in 20X5?
CA = 250,000
Future deductions = Tax cost – accumulated tax depreciation = 200,000 – 0 = 200,000
Tax base = 250,000 + 200,000 – 250,000 = 200,000
CA of $250,000 – TB of $200,000 = Temporary Difference of $50,000.
Deferred Tax is $12,500 DTL (50,000 Temporary Difference x 25%)
IAS 12, para. 51B requires that the deferred tax arising from a non-depreciable asset reflects the tax
consequences applicable for sale REGARDLESS of the intention of management.
Therefore, the tax rate of 25% applicable for sale is used.
Question 9 – Entity A
Entity A purchased the controlling shares of Entity Z. As a result of the business combination,
goodwill of $30,000 was recognised. Goodwill is an asset.
What is the deferred tax that will be recognised in relation to the business combination?
Answer:
Goodwill will have a carrying amount for accounting purposes but no tax base and hence it
would give rise to a DTL. However, in terms of IAS 12, para. 15, the exception applies to the
recognition of deferred tax liabilities relating to goodwill and thus, zero deferred tax will be
recognised.
Tax base of revalued assets
Carrying amt
Recovery + Future Tax cost - acc tax

Tax base = deductions dep
through use
- Future taxable
Full revalued amt
amts
Carrying amt
CGT not + Future Tax cost - acc tax

Tax base =
applicable deduction dep
Method of - Future taxable Revalued amt

recovery / type Recovery amts limited to cost
of asset through sale
Carrying amt
CGT applicable Tax base =

+ Future tax CGT cost base -
deductions acc tax dep
- Future taxable
Full revalued amt
Carrying amt amts
Recovery of non-
+ Future Tax cost - acc tax
depreciable Tax base = deductions dep
asset
- Future taxable
Full revalued amt
amts
Recovery through use
Question 10a - Recovery through use
Coal Ltd purchased a truck on 1 Jan 20X1 for $120 000. The truck
is depreciated over 10 years for accounting purposes and over 8
years for tax purposes. Coal Ltd uses the revaluation model.
The CGT Cost base is $130 000.
On 31 Dec 20x3, the truck was revalued to a CA of $140 000.
In 20X3, what would be the tax-effect journal entry related to

the revaluation if management intend recover the truck through
use?
CA TB TD DT
Opening balance 96 000
Dep movement
120 000 -
(120 000/10)
x 2 years
Reval
Closing balance
CA TB TD DT
Opening balance 96 000 90 000 6 000
Dep movement
120 000 - 120 000 -
(120 000/10) (120 000/8)
x 2 years x 2 years
Reval
Closing balance
CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement
120 000 - 120 000 -
Dr balance =
(120 000/10) (120 000/8)
DTL
x 2 years x 2 years
Reval
Closing balance
CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
Dr DT expense
Cr DTL
Reval
Closing balance
CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval
Closing balance
CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval
Closing balance 140 000

Carrying amt

through use
- Future taxable
Full revalued amt
amts
Carrying amt

Tax base =

Carrying amt

- Future taxable
Full revalued amt
Carrying amt amts
Recovery of non-
asset
- Future taxable
Full revalued amt
amts
Recovery through use
CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval 140 + 75 - 140
Closing balance 140 000 75 000

CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval 140 + 75 - 140
Closing balance 140 000 75 000 65 000 19 500

CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval 56 000
Closing balance 140 000 75 000 65 000 19 500

CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval 56 000 0
Closing balance 140 000 75 000 65 000 19 500

CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dep movement (12 000) (15 000) 3 000 900
84 000 75 000 9 000 2 700
Reval 56 000 0 56 000
Closing balance 140 000 75 000 65 000 19 500

CA TB TD DT
Opening balance 96 000 90 000 6 000 1 800
Dr DT expense (OCI)
Dep movement (12 000) (15 000) 3 000Cr DTL 900
84 000 75 000 9 000 2 700
Reval 56 000 0 56 000 16 800
Closing balance 140 000 75 000 65 000 19 500

Taxable
$84 000
$56 000 Taxable
$84 000
$56 000 Taxable
$84 000
Carrying amt

through use
- Future taxable
Full revalued amt
amts
Carrying amt

Tax base =

Carrying amt

- Future taxable
Full revalued amt
Carrying amt amts
Recovery of non-
asset
- Future taxable
Full revalued amt
amts
Recovery through sale
Question 10b – Recovery through sale (no CGT)
Coal Ltd purchased a truck on 1 Jan 20X1 for $120,000. The truck is
depreciated over 10 years for accounting purposes and over 8 years
for tax purposes. Coal Ltd uses the revaluation model.
The CGT Cost base is $130,000.
On 31 Dec 20x3, the truck was revalued to a CA of $140,000.
What is the TB on 31 Dec 20X3 if management intend to sell the

truck and CGT is not applicable?
1 Jan 20X1 Truck was purchased for $120,000. Depreciation - 10 years for accounting / 8 years for tax.
Coal Ltd uses the revaluation model. The CGT Cost base is $130,000. On 31 Dec 20x3, truck was revalued a CA of $140,000.
What is the TB on 31 Dec 20X3 if management intend to sell the truck and CGT is not applicable?
CA + Future deductible amounts – Future taxable amounts = Tax Base


CA (Carrying Amount – what is shown in the accounting books) = $140,000
Cost $120,000 then accounting depreciation at $12,000 per year for 3 years ($36,000) to WDV of $84,000.
Then, revalued on 31 Dec 20X3 to $140,000
$140,000 + $75,000 - $120,000 = $95,000


Future deductible amounts (Amount still to deduct for tax purposes) = $75,000
Cost $120,000 - $45,000 of Tax Depreciation ($15,000 per year because $120,000 / 8 years).
$140,000 + $75,000 - $120,000 = $95,000


Future taxable amounts (Amount still to deduct for accounting purposes) = $120,000
Revalued amount – limited to cost.
The ‘depreciation’ has been added back on to the asset value
$140,000 + $75,000 - $120,000 = $95,000


Future taxable amounts (Amount still to deduct for accounting purposes) = $120,000
Revalued amount – limited to cost.
The ‘depreciation’ has been added back on to the asset value
Tax base = $95,000
$140,000 + $75,000 - $120,000 = $95,000

CGT is not applicable so we need to determine the capital gain portion and split
this revaluation into the portion that is taxable and the portion that is not taxable.
CA $84 000
CGT is not applicable so we need to determine the capital gain portion and split
this revaluation into the portion that is taxable and the portion that is not taxable.
$56 000
CA $84 000
Taxable
$56 000
Not taxable
CA $84 000
CG Not taxable
Cost
$120
Taxable
CA $84 000
CG Not taxable
Cost
$120
$36 000 Taxable
CA $84 000
CG Not taxable
$20 000
Cost
$120
$36 000 Taxable
CA $84 000
CG Not taxable
$20 000
Cost
$120
$36 000 Taxable
CA $84 000
Question 10c – Recovery through sale (CGT applicable)
Coal Ltd purchased a truck on 1 Jan 20X1 for $120 000. The truck
is depreciated over 10 years for accounting purposes and over 8
years for tax purposes. Coal Ltd uses the revaluation model.
The CGT Cost base is $130 000.
On 31 Dec 20x3, the truck was revalued to a CA of $140 000.
What is the DT balance at the end of 20X3 if management intend

to sell the truck and CGT is applicable?
Step 1: calculate TB
TB = CA + FDA - FTA
TB = CA + FDA - FTA
CA = 140 000
TB = CA + FDA - FTA
CA = 140 000
Future deductions = 85 000
(CGT cost base – Accumulated tax dep)
(130 000 – 45 000)
TB = CA + FDA - FTA
CA = 140 000
(130 000 – 45 000)
Future taxable amount = 140 000
TB = CA + FDA - FTA
CA = 140 000
(130 000 – 45 000)
TB = 85 000 (140 + 85 – 140)

TB = CA + FDA - FTA
CA = 140 000
(130 000 – 45 000)
TB = 85 000 (140 + 85 – 140)

Step 2: calculate TD and DT

CA TB TD DT
Closing 140 000 85 000
balance
CA TB TD DT
Closing 140 000 85 000 55 000
balance
CA TB TD DT
Closing 140 000 85 000 55 000 16 500
balance
Dr = DTL
Taxable
130
Not taxable
120
Taxable
CA
$84 000
Taxable
130
Not taxable
120
Taxable
$36 000
CA
$84 000
Taxable
130
$10 000 Not taxable
120
Taxable
$36 000
CA
$84 000
$10 000 Taxable

130
$10 000 Not taxable
120
Taxable
$36 000
CA
$84 000
Carrying amt

through use
- Future taxable
Full revalued amt
amts
Carrying amt

Tax base =

Carrying amt

- Future taxable
Full revalued amt
Carrying amt amts
Recovery of non-
asset
- Future taxable
Full revalued amt
amts
Recovery of non-depreciable asset
Question 11 – Putt-putt Ltd
Putt-putt Ltd purchased a piece of non-depreciable land

which cost $250 000 in 20X1.
In 20X5, an independent valuation expert valued the
land at $400 000.
The tax rate applicable if the land is sold is 20%.
The tax rate applicable to amounts derived from the use
of the land is 30%.
Management intend to continue using the land.
What is the deferred tax balance at the end of 20X5?

CA TB TD DT
Reval
Closing balance
CA TB TD DT
Reval
Closing balance 400 000

Recovery of non-depreciable asset
CA TB TD DT
Reval
Closing balance 400 000 250 000
400 + 250 - 400

CA TB TD DT
Reval
Closing balance 400 000 250 000 150 000
400 + 250 - 400

CA TB TD DT
Reval
Closing balance 400 000 250 000 150 000 30 000
400 + 250 - 400

150 x 20%
CA TB TD DT
Reval 150 000 0 150 000 30 000
Closing balance 400 000 250 000 150 000 30 000

Question 12 – Circus Ltd
20X1 20X2 20X3
Accounting profit before tax (5 000) 3 500 8 000
Less: Additional tax depreciation -500 -500 -500
Taxable profit (loss) before utilising
unused tax loss (5 500) 3 000 7 500
Less: Tax losses recouped 0 (3 000) (2 500)
Taxable profit (loss) (5 500) 0 5 000
Current tax payable 0 0 1 500
Notes:
1. Circus Ltd bought an asset on 1 Jan 20X1 for $10 000.
a. the asset is depreciated at 20% for accounting purposes
b. and 25% for tax purposes
2. Temporary differences relating to depreciation is expected to
reverse before the end of the 10-year tax loss carry forward period
that commenced 31 Dec 20X1.
3. Carry-back of tax losses is not permitted.
4. The tax rate is 30%.
5. At the end of 20X1 and 20X2, it was not probable that there would
be any other future taxable profits
What are the tax-effect journal entries for 20X1, 20X2 and 20X3?


recognised.
Then allocate the remainder to tax

losses for which DTA has been
recognised.
Answering this type of question
The ‘difficulty’ with this question is you

need to know:

need to know:
The amount of tax losses

need to know:
The amount DTA you can recognise

need to know:
The amount of unrecognised tax losses

need to know:
The amount that you recoup

need to know
The amount that you recoup
So how do we solve this?

We create a table to help keep track of
things
We follow a structured approach using
steps.
Table
20X1 20X2 20X3

Unrecognised tax loss
Tax losses in current period
Tax losses for which DTA has been

recognsied in the current period
Unrecognised tax losses recouped
Unrecognised tax loss
Total tax losses for which DTA has
been recognised
Steps
Step 1: Process any additional adjustments /

transactions that were provided in the notes.
Steps

Step 2: Recognise any deferred tax

Steps

Step 3: Recoup tax losses (Remember the rule)

Steps

Step 3: Recoup tax losses (Remember the rule)
Step 4: Recognise current tax payable

20X1 20X2 20X3
unused tax loss (5 500) 3 000 7 500
Notes:
Deferred tax calculation
CA TB TD DT
Depreciation (2 000) (2 500) 500 150

movement
Closing balance 8 000 7 500 500 150
Dr balance =
DTL
20x1
Step 1:
No adjustments.
Step 2:
Dr Deferred tax expense 150
Cr DTL 150
20X1 20X2 20X3
unused tax loss (5 500) 3 000 7 500
Notes:
20x1
Step 1:
No adjustments.
Step 2:
Cr DTL 150
Dr DTA 150
Cr Current tax income 150
NOTE the
opposite
account!!
Dr Deferred tax
DTL
liability

Dr DTA
income
DTA
Dr Deferred tax
Dr DTA
Cr DTA
Unused tax losses

Dr Deferred tax
20x1
Step 3:
No recoupment in 20X1.
20x1
Step 3:
Step 4:
No current tax payable in 20X1.
20x1
20X1 20X2 20X3 Step 3:

Unrecognised tax loss 0
Tax losses in current period 5 500
5 500
Step 4:
recognsied in the current period -500
Unrecognised tax losses recouped 0 No current tax payable in 20X1.
been recognised 500
150 / 30% =
500
20x2
Step 1:
No adjustments.
Step 2:
Cr DTL 150
Dr DTA 150
20x2
20X1 20X2 20X3

Unrecognised tax loss 0 5 000
Tax losses in current period 5 500 0
5 500 5 000
recognsied in the current period -500 -500
Unrecognised tax losses recouped 0
been recognised 500
Circus Ltd
20X1 20X2 20X3
unused tax loss (5 500) 3 000 7 500
Notes:
20x2
Step 3:
We need to recoup $3,000 in 20X2
3 000 x 30%
= 900
20x2
Step 3:
20X1 20X2 20X3

Tax losses in current period 5 500 0 3 000 x
30% = 900
5 500 5 000
been recognised 500
Dr Deferred tax
DTL
liability

Dr DTA
income
DTA
Dr Deferred tax
Dr DTA
Cr DTA
Unused tax losses

Dr Deferred tax
20x2
Dr Deferred tax expense 900 Step 3:
20X1 20X2 20X3

Tax losses in current period 5 500 0 3 000 x
30% = 900
5 500 5 000
been recognised 500
20x2
20X1 20X2 20X3 Step 3:

Tax losses in current period 5 500 0 We need to recoup $3,000 in 20X2
5 500 5 000
Step 4:
Unrecognised tax losses recouped 0 -3000 No current tax payable in 20X2.
been recognised 500 1 000
Circus Ltd
20X1 20X2 20X3
unused tax loss (5 500) 3 000 7 500
Notes:
20x3
Step 3:
20x3
Step 3:
2 500 x
30% = 750
This is the $1,500 in unrecognised tax

losses + $1,000 of recognised losses (the
ones offset against depreciation DTLs)
($500 x 30% in Year 1 and $500 x 30% in
Year 2)
20x3
Step 3:
20X1 20X2 20X3

Unrecognised tax loss 0 5 000 1 500
Tax losses in current period 5 500 0 0
5 500 5 000 1 500
Unrecognised tax losses recouped 0 -3000
20x3
Step 3:
We need to recoup $2 500 in 20X3

1 500 x 30%
= 450
20x3
Step 3:
20X1 20X2 20X3

5 500 5 000 1 500

20x3
Step 3:
20X1 20X2 20X3

5 500 5 000 1 500

Dr Deferred tax expense 300 1 000 x 30%

Cr DTA 300 = 300
20x3
Step 4:
Dr Current tax expense 1 500
Cr Tax payable 1 500
20X1 20X2 20X3
5 500 5 000 1 500
recognsied in the current period -500 -500 0
Unrecognised tax losses recouped 0 -3000 -1500
been recognised 500 1 000 0
IFRS 3
IFRS 3, para. 32
FV of
Consider- FV of net
Goodwill previous NCI
ation assets
interest
IFRS 3
IFRS 3, para. 37
Assets Liabilities
Consideration Equity issued
transferred incurred
FV at acquisition date
Question 13 – Cumin and Coriander
Cumin Ltd purchased 80 per cent of the shares in Coriander Coriander Ltd Book value Fair value
Ltd on 1 January, which effectively gave Cumin Ltd control Assets
over Coriander Ltd. On 1 January, the following information
about Coriander Ltd was available: Plant – carrying amount $85 000 $91 000
The applicable tax rate is 30 per cent and the tax bases of Vehicle – carrying
all the assets and liabilities were equal to their carrying $20 000 $25 000
amount
amount prior to the acquisition.
Inventory – cost $15 000 $15 000
The notes to the financial statements indicated that
Coriander Ltd had a separately identifiable intangible
asset of $20,000. Equity and Liabilities
In addition, the notes to the financial statements
Equity – 100 000 shares $100 000 $120 000
identified the following:
Contingent liability: Coriander Ltd is being sued for Loan $15 000 $15 000
$30,000 for allegedly making disparaging remarks
against a competitor.
Contingent asset: Coriander Ltd is suing a supplier for
$25,000 for non-performance of the supplier’s
contractual obligations.
Question 13a - Cumin and Coriander
Question 1a: (4 marks)
Calculate the deferred tax assets and deferred tax liabilities that will arise from the business
combination on 1 January. For each calculation, indicate if it is a deferred tax asset (DTA) or a
deferred tax liability (DTL).
Carrying Temporary Deferred

Item Tax base DTA / DTL
amount difference tax
Plant $91 000 $85 000 $6 000 $1 800 DTL
Vehicle $25 000 $20 000 $5 000 $1 500 DTL
Intangible asset $20 000 $0 $20 000 $6 000 DTL
Contingent Liability $30 000 $0 $30 000 $9 000 DTA

Question 13b – Cumin and Coriander
Question 1b: (5 marks)
Calculate the net identifiable assets of Coriander Ltd that will be used in the calculation of goodwill or bargain purchase.
Element Amount
Plant $91 000
Vehicle $25 000
Inventory $15 000
Element Amount
Plant $91 000
Vehicle $25 000
Inventory $15 000
Intangible asset $20 000
Deferred tax asset arising from recognition of contingent liability $9 000
Loan ($15 000)
Contingent liability ($30 000)
Deferred tax liability arising from FV adjustment of plant ($1 800)
Deferred tax liability arising from FV adjustment of vehicle ($1 500)
Deferred tax liability arising from recognition of intangible asset ($6 000)
$105 700
Element Amount
Plant $91 000
Vehicle $25 000
Inventory $15 000
Loan ($15 000)
$105 700
Element Amount
Plant $91 000
Vehicle $25 000
Inventory $15 000
Loan ($15 000)
$105 700
Question 14 – Salt and Pepper
Salt and Pepper Ltd
Pepper Ltd is an event-management organisation that runs corporate events. Two years ago, Pepper Ltd acquired a 25
per cent interest in Salt Ltd, which is a provider of hospitality services for corporate events, for $28 000.
On 1 January this year, Pepper Ltd acquired an additional 60 per cent of the shares in Salt Ltd for $86 000, which
effectively gave Pepper Ltd control over Salt Ltd. Pepper Ltd paid a premium in order to gain control, as the fair value of
Salt Ltd’s net identifiable assets was only $120 000.
The fair value of Pepper Ltd’s 25 per cent interest in Salt Ltd on 1 January was $32 000 and the fair value of non-
controlling interests was $24 000.

Calculate the goodwill or bargain purchase using the partial goodwill method.

What would be the goodwill or bargain purchase if the full goodwill method is used?
Question 14a – Salt and Pepper
Calculate the goodwill or bargain purchase using the partial goodwill method.
The calculation of goodwill requires the use of fair values. Thus, the amount of previously held interest that Pepper Ltd held
in Salt Ltd must be included in the calculation of the FV on the date of acquisition of the additional purchase.
NCI using the partial goodwill method is:

NCI = total net identifiable assets of the acquiree multiplied by the relevant NCI percentage.
Element Amount
Consideration transferred $86,000
FV of previously held interest $32,000
Non-controlling interest $18,000 NCI = $120,000 x 15% = $18 000
$136,000
Fair value of net identifiable assets ($120,000)
Goodwill $16,000
Question 14b – Salt and Pepper

What would be the goodwill or bargain purchase if the full goodwill method is used?
Here the same calculation would be used except the amount for NCI would be the fair value as at 1 January.
Element Amount
Consideration transferred $86,000
FV of previously held interest $32,000
Non-controlling interest $24,000
$142,000
Fair value of net identifiable assets ($120,000)
Goodwill $22,000

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Financial Reporting

RMIT Review Session 2

Theashen Vandiar CA CPA

a) What is the non-temporary difference?

Income Accounting Profit Taxable Profit Difference

$753,000 x 30% = WRONG!!

a) What is the non-temporary difference?

$2,500 + $1,000 = $3,500

a) What is the non-temporary difference?

b) What is current tax expense?

We start with accounting

There is $4,000 more

This is not included in But for tax purposes it is recognised

Only half of the

Step 1: start with

Do NOT give rise to

Step 2: adjust for

Temporary difference Asset = CA + FD - FT

X Tax rate Tax base Liability = CA – FD + FT

Barber Ltd received income of $3,000 in advance from its loyal

Barber Ltd received income of $3,000 in advance from its loyal

For Tax Purposes: 20% or $600 is

Source: International Accounting Standards Committee 1994, Income

Barber Ltd received income of $3,000 in advance from its loyal

Balance 3,000 2,400 600

Balance 3,000 2,400 600 180

Farmer Brown purchased a tractor that cost 120 000.

Opening 120 000 120 000 0 0

Opening 120 000 120 000 0 0

Movement (24 000) 120 000 /

Opening 120 000 120 000 0 0

Opening 120 000 120 000 0 0

Movement (24 000) (30 000) 6 000

Movement (24 000) (30 000) 6 000 1 800

Opening 120 000 120 000 0 0

Movement (24 000) (30 000) 6 000 1 800

Closing 96 000 90 000 6 000 1 800

Warranty obligation 5,000

a. What is the tax base for the warranty obligation?

Tax base = CA – future deductions + future taxable amounts

5,000 0 5,000 1,500 DTA

Therefore DTA that will

DR Deferred tax asset (B/s) 600

Deferred tax journals

Unused tax losses

a. What is the deferred tax liability for 20x1?

DTL = Taxable temporary difference x tax rate

b. What is the journal entry for the

b. What is the journal entry for the

$7,000 Tax Loss x 30% = $2,100 DTA

But, other than the TTD of $4,000 it is

7,000 tax loss

b. What is the journal entry for the

$7,000 Tax Loss x 30% = $2,100 DTA

But, other than the TTD of $4,000 it is

7,000 tax loss So you can only recognise this to the

b. What is the journal entry for the

7,000 tax loss

b. What is the journal entry for the

So $900 of DTA is not recognised

7,000 tax loss

b. What is the journal entry for the

7,000 tax loss