IAS 12 : Practice Questions Answers

Question 1
(a) Taxable profit for the year ended 31 December 2012:
Accounting profit before tax $80,000
Add: Non-taxable dividends received $30,000
Less: Non-deductible legal costs ($20,000)
Taxable profit $90,000

(b) Cumulative tax loss on 31 December 2012:

Cumulative taxable temporary differences $600,000
Less: Cumulative taxable profit ($90,000)
Cumulative tax loss $510,000

(c) Deferred tax balance on 31 December 2012:

Deferred tax liability (cumulative taxable temporary differences at 25%) $150,000
Less: Deferred tax asset (tax loss at 25%) ($28,000)
Deferred tax liability $122,000

(d) Taxable profit for the year ended 31 December 2013:

Accounting profit before tax $100,000
Taxable profit $100,000

(e) Cumulative tax loss on 31 December 2013:

Cumulative taxable temporary differences $580,000
Less: Cumulative taxable profit ($90,000 + $100,000) $190,000
Cumulative tax loss $390,000

(f) Deferred tax balance on 31 December 2013:

Deferred tax liability (cumulative taxable temporary differences at 25%) $145,000
Less: Deferred tax asset (tax loss at 25%) ($28,000)
Deferred tax liability $117,000

(g) Income tax expense note to the statement of profit or loss and other comprehensive income:

Year ended 31 December 2012:

Taxable profit $90,000
Income tax expense (25%) $22,500

Year ended 31 December 2013:

Taxable profit $100,000
Income tax expense (25%) $25,000

(h) Deferred tax note to the statement of financial position:

Deferred tax liability as at 31 December 2012 $122,000

Deferred tax liability as at 31 December 2013 $117,000
Deferred tax asset as at 31 December 2012 ($28,000)
No deferred tax asset as at 31 December 2013 (as tax loss has been fully utilized)
Net deferred tax liability as at 31 December 2012 $94,000
Net deferred tax liability as at 31 December 2013 $117,000
Question 2
Tax Notes to the Financial Statements of Make It Ltd for the Year Ended 31 December 2015:

(a) Taxable profit for the year ended 31 December 2015:

Accounting profit before tax $1,235,000

Add: Non-taxable dividends received $15,000
Less: Non-deductible donations ($15,000)
Less: Non-deductible research costs ($35,000)
Less: Non-deductible interest paid ($75,000)
Less: Non-deductible operating expenses ($2,040,000)
Add: Tax allowable depreciation on PPE $188,000
Less: Tax allowable research costs ($8,750) ($35,000/4)
Less: Tax allowable doubtful debts ($95,000) 25% of ($380,000 - $25,000)
Taxable profit $200,250

(b) Cumulative tax loss on 31 December 2015:

Cumulative taxable temporary differences $364,000 - $248,000 = $116,000

Less: Cumulative taxable profit ($90,000 + $100,000 + $200,250) $390,250
Cumulative tax loss ($274,250)

(c) Deferred tax balance on 31 December 2015:

Deferred tax liability (cumulative taxable temporary differences at 28%) $32,480

Deferred tax asset (cumulative deductible temporary differences at 28%) ($7,350) ($26,250 x
28%)
Deferred tax liability $25,130
(d) Income tax expense note to the statement of profit or loss and other comprehensive income:

Year ended 31 December 2015:

Taxable profit $200,250
Income tax expense (28%) $56,070

(e) Deferred tax note to the statement of financial position:

Deferred tax liability as at 31 December 2014 $62,090

Deferred tax liability as at 31 December 2015 $25,130
Deferred tax asset as at 31 December 2014 ($7,350)
No deferred tax asset as at 31 December 2015 (as tax loss has been fully utilized)
Net deferred tax liability as at 31 December 2014 $54,740
Net deferred tax liability as at 31 December 2015 $25,130

(f) Current tax note to the statement of financial position:

Current tax liability as per tax return for 2014 $5,000

Less: Amount provided for in 2014 ($107,823 - $56,070 - $5,000) $46,753
Current tax liability $51,753
Question 3

a) Corporate income tax liability for the year ended 31 December 2018:

Accounting profit before tax $125,000

Add: Depreciation charge $14,000
Less: Tax allowable depreciation on PPE ($48,000 + $12,000) $60,000
Taxable profit $79,000
Income tax expense (30%) $23,700

b) Deferred tax balance and journal entry as at 31 December 2018:

Cumulative taxable temporary differences:

Capital additions $60,000 - Tax allowances $31,000 = $29,000
Cumulative deductible temporary differences:
Depreciation charge $25,000 - Tax allowances $31,000 = ($6,000)
Deferred tax liability (cumulative taxable temporary differences at 30%) $8,700
Deferred tax asset (cumulative deductible temporary differences at 30%) ($1,800) ($6,000 x
30%)
Deferred tax liability $6,900

Journal entry:
Income tax expense $23,700
Deferred tax liability $6,900
Current tax liability $16,800
c) Income statement note for the year ended 31 December 2018:
Income tax expense:
Current tax liability $16,800
Deferred tax liability $6,900
Total income tax expense $23,700

d) Note reconciling accounting profit and tax expense:

Accounting profit before tax $125,000
Tax at 30% $37,500
Permanent difference:
Provision for warranty ($1,200)
Fine $6,000
Taxable profit $79,000
Tax at 30% $23,700

e) Permanent differences between accounting profits and taxable profits do not have deferred tax
consequences because they are items that are either not included in the calculation of taxable
profit or are not deductible for tax purposes. Therefore, there is no timing difference between
accounting profits and taxable profits, and no deferred tax asset or liability is required.

f) Cost model is a subsequent measurement method of valuing property, plant and equipment
where the assets are initially recorded at cost and subsequently measured at cost less
accumulated depreciation and any accumulated impairment losses. This method is used when the
future economic benefits of the asset are expected to flow to the entity through consumption or
sale.
Revaluation model is a subsequent measurement method of valuing property, plant and
equipment where the assets are initially recorded at cost and subsequently revalued to fair value
less accumulated depreciation and any accumulated impairment losses. This method is used
when there is an active market for the asset or when the fair value can be determined reliably.
The revaluation surplus or deficit is recognized in other comprehensive income and accumulated
in equity as a separate component of equity.
Question 4

a) Reconciliation between accounting profit and taxable income:

Accounting profit before tax $550,000

Add:
Non-taxable items:
Dividends received $40,000
Gain on sale of land $110,000
Total non-taxable items $150,000
Less:
Non-deductible items:
Donations $20,000
VAT penalty $5,000
Total non-deductible items $25,000
Temporary differences:
Depreciation on office building $10,000
Depreciation on manufacturing plant $10,000
Wear and tear allowance ($85,000)
Total temporary differences ($65,000)
Taxable income $420,000

b) Deferred tax balance and journal entry as at 31 December 2013:

Cumulative taxable temporary differences:

Manufacturing plant: carrying amount $140,000 - tax base $115,000 = $25,000
Cumulative deductible temporary differences:
Office building: carrying amount $150,000 - tax base $200,000 = ($50,000)
Deferred tax asset (cumulative deductible temporary differences at 28%) ($14,000) ($50,000 x
28%)
Deferred tax liability (cumulative taxable temporary differences at 28%) $7,000 ($25,000 x 28%)
Net deferred tax asset $7,000

Journal entry:
Income tax expense $119,000 $420,000 x 28%
Deferred tax asset $7,000
Current tax liability $112,000 $119,000 - $7,000

c) Income tax expense for the year ended 31 December 2013:

Current tax liability $112,000

Deferred tax asset ($14,000)
Total income tax expense $98,000

d) Tax rate reconciliation for the year ended 31 December 2013:

Accounting profit before tax $550,000

Income tax at statutory rate (28%) $154,000
Non-deductible expenses $25,000
Non-taxable income ($150,000)
Temporary differences ($65,000)
Income tax expense $98,000