BKAR 3033 FINANCIAL ACCOUNTING AND REPORTING III (A211)

EXERCISE - DEFERRED TAX

QUESTION 1

The carrying amount and tax base of financial statement items of Berseri Bhd as at 31 December
2020 are as follows:

31 December 2020
Carrying Tax Base
Amount
Property, plant & equipment 30,800 24,500
Research and development 3,000 0
Accounts receivable 2,500 2,800
Inventory 4,000 4,000
Bank 1,500 1,500
Trade payables 3,000 3,000
Accrued interest 500 0
Penalties payable 200 200
10% bank loan 10,000 10,000
Provision for warranties 800 0
Deferred tax liability as at 1 January 900 900

Additional information:

1. The tax rate for the year 2020 is 25%. Assume that the previous year’s tax rate was 30%.

REQUIRED:

Compute the deferred tax expense for the year 2020.

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 31 December 2020
Carrying Tax Base Deductible (Taxable) temporary
Amount difference
Property, plant & equipment 30,800 24,500 (6,300)
Research and development 3,000 0 (3,000)
Accounts receivable 2,500 2,800 300
Inventory 4,000 4,000 0
Bank 1,500 1,500 0
Trade payables 3,000 3,000 0
Accrued interest 500 0 500
Penalties payable 200 200 0
10% bank loan 10,000 10,000 0
Provision for warranties 800 0 800
Deferred tax liability as at 1 900 900 0
January
Net taxable temporary difference 7,700
Tax rate 25%
Deferred tax liability 1,925

Tax rate adjustment = RM900 x (30-25)/30

= RM150

Deferred tax liability at 1 January = RM900 – RM150

= RM750

Net deferred tax expense = RM1925 – RM750

= RM1,175

Deferred tax expense

= deferred tax asset/liability at 31 December - deferred tax asset/liability at 1 January

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 QUESTION 2

Sufi Bhd (Sufi) is a technology startup company, incorporated in Malaysia since year 2014. The
company involves in providing information technology (IT) solutions and services. Sufi reported
profit of RM42,000 for the financial year 2016. The following information are extracted from the
financial accounting record of Sufi for the year ended 31 December 2016.

1. An IT equipment was bought in January 2014 for RM280,000. The company charged
depreciation at a rate of 20% per annum.
2. A research and development cost amounted to RM25,000 incurred during year 2016 and
qualified to be treated as intangible asset.
3. An interest revenue from investment in bond amounted to RM12,500 was earned during the
year, but the amount is receivable in year 2017.
4. An entertainment expense of RM18,000 was paid to entertain new clients.
5. An interest expense amounted to RM29,200 was incurred due to borrowing from bank. Half
of the amount is payable in year 2017.
6. A donation of RM5,000 was made to IRB approved charity fund organized by the local
community during the year.

It is required by Malaysian law that each corporations must file in their income tax return form
and compute tax payable to Inland Revenue Board (IRB) every year. Under tax rule, the
equipment entitled capital allowance at a rate of 30% in the first year of operation and 10% in the
remaining years. Given that tax rate applicable for year assessment 2016 is 25%.

REQUIRED:

a) Identify whether there is any difference between accounting rule and tax rule in each of the
above situation. If the difference exists, state whether the difference is temporary or
permanent.
b) Compute deferred tax asset and deferred tax liability (if any) for each of the above situation.
c) Determine the amount of tax payable to IRB for year assessment 2016. Prepare the
necessary journal entry.

profit x tax rate = income tax expense

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 (a)
1. temporary difference
2. temporary difference
3. temporary difference
4. permanent difference
5. temporary difference
6. no

(b)

Situation 1

Accounting rule Tax rule

Accumulated depreciation = 280,000 x 20% x 3 Capital allowance = 280,000 x 30% + 280,000 x 10% x 2
= 168,000 = 140,000

Carrying amount = 280,000 – 168,000 Tax base = 280,000 – 140,000

= 112,000 = 140,000

CA asset < TB asset

Deductible temporary difference = RM140,000 – RM112,000

= RM28,000

Deferred tax asset = RM28,000 x 25%

= RM7,000

Situation 2

Carrying amount = 250,000 Tax base = 0

CA asset > TB asset

Taxable temporary difference = RM25,000

Deferred tax liability = RM25,000 x 25%

= RM6,250

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Situation 3

Carrying amount = 12,500 Tax base = 0

CA asset > TB asset

Taxable temporary difference = RM12,500

Deferred tax liability = RM12,500 x 25%

= RM3,125

Situation 5

Carrying amount = 146,000 Tax base = 0

CA liability > TB liability

Deductible temporary difference = RM14,600

Deferred tax asset = RM14,600 x 25%

= RM3,650

(c) income tax expense = 42,000 x 25%

= 10,500

Deferred tax asset = 7,000 – 6,250 – 3,125 + 3,650

= 1,275

income tax payable = 10,500 + 1,275

= 11,775

Journal entry:

Income tax expense 10,500

Deferred tax asset (7,000 – 6,250 – 3,125 + 3,650) 1,275

Income tax payable 11,775

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 QUESTION 3

Suci Bhd has the following information as at 31 December 2017 in relation to the deferred tax
calculation:
Carrying amount
RM
Property, plant and equipment 750,000
Account receivables 280,000
Account payables 230,000
Capitalized development costs 42,000
Provision for warranties 51,500
Provision for retirement benefits 27,000

Additional information:

Given that tax base for Property, plant and equipment was RM300,000 (due to capital allowance
allowed under tax rule). The tax base for account receivable and account payable were
RM350,000 and RM175,000 respectively. Additionally, it was determined that tax base for
provisions for warranties and retirement benefits were nil.
Under tax rule, all research and development cost are allowed to be deducted from taxable
income.
As at 1 January 2017, the balance of deferred tax liability was RM23,900.
The current tax rate is 25%. Assume the tax rate has not changed since the last few years.
The tax payable for the year was calculated at RM120,000.

REQUIRED:

Calculate tax expense for the year ended 31 December 2017.

Prepare journal entry to record tax expense.

Carrying amount Tax base Deductible (Taxable) temporary difference

Property, plant and equipment 750,000 300,000 (450,000)

Account receivables 280,000 350,000 70,000
Account payables 230,000 175,000 55,000
Capitalized development costs 42,000 0 (42,000)
Provision for warranties 51,500 0 51,500
Provision for retirement benefits 27,000 0 27,000
Deferred tax liability at 31 December
Deferred tax liability at 1 January
Increase in deferred tax liability

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 Carrying Tax base Deductible (Taxable) temporary difference
amount
Property, plant and equipment 750,000 300,000 (450,000)
Account receivables 280,000 350,000 70,000
Account payables 230,000 175,000 55,000
Capitalized development costs 42,000 0 (42,000)
Provision for warranties 51,500 0 51,500
Provision for retirement benefits 27,000 0 27,000
Taxable temporary difference 288,500
Tax rate 25%
Deferred tax liability at 31 December 72,125
Deferred tax liability at 1 January (23,900)
Deferred tax expense 48,225

Income tax expense = 120,000 + 48,225

= 168,225

Journal entry:

Income tax expense 168,225

Deferred tax liability 48,225

Income tax payable 120,000