1 (a) Tax Computation for ABC Ltd

(TD =  Temporary Difference; PD = Permanent Difference)

Year:
20x1 20x2
Net profit before tax $800,000 $1,000,000
Adjustments
Dividend income $(25,000) $(18,000)
Remitted $0 $33,000
TD $(25,000) $(15,000)
Exempt dividend income (PD) $(40,000) $(35,000)
Amortization of patent $0 $8,000
Deduction $(40,000) $0
TD $(40,000) $8,000
Depreciation $66,000 $88,000
Capital allowances $(200,000) $(150,000)
TD $(146,000) $(62,000)
Disallowed amortization (PD) $7,500 $7,500
Exchange gains $(5,000) $(8,000)
Realized gains $0 $5,000
TD $(5,000) $(3,000)
Fair value gains $(70,000) $(65,000)
Taxable income $543,500 $865,500
Tax rate 22% 21%
Tax payable $119,570 $181,755

1 (b) Balance sheet liability approach

Year: 20x1 20x2
Carrying amount $25,000 $10,000
Tax base $0 0
Taxable temporary difference $25,000 $10,000
Development expenditure
Carrying amount $40,000 $32,000
Tax base $0 $0
Taxable temporary difference $40,000 $32,000
Fixed asset
Carrying amount $384,000 $296,000
Tax base $300,000 $150,000
Taxable temporary difference $84,000 $146,000
Unrealized exchange gains
Carrying amount $5,000 $8,000
Tax base $0 $0
Taxable temporary difference $5,000 $8,000
Investments at fair value
Carrying amount $1,270,000 $1,335,000
Tax base $1,200,000 $1,200,000
Taxable temporary difference $70,000 $130,000
Cumulative taxable temporary differences $224,000 $331,000
Taxable temporary difference of $15,000 (20x1: $22,500) arising from trademarks are not
recognized under IAS 12 paragraph 15.

Movements in cumulative taxable temporary differences

Year 20x1 20x2

Balance, 1 January $0 $224,000

Change $224,000 $107,000
Balance, 31 December $224,000 $331,000

1 (c) Movements in deferred tax liability

Year: 20x1 20x2
Balance, 1 January $0 $49,280
Change $49,280 $20,230
Balance, 31 December $49,280 $69,510

Determination of tax expense

Year: 20x1 20x2
Tax payable $119,570 $181,755
 Deferral tax liability $49,280 $20,230
Tax expense $168,850 $201,985

2. Journal entries
Year: 20x1 20x2
Dr Tax expense $168,850 $201,985
Cr Deferred tax liability $49,280 $20,230
Cr Tax payable $119,570 $181,755
Being tax expense recorded for the respective years.

3. Analytical check of tax expense

Year: 20x1 20x2
Profit before tax (PBT) $800,000 $1,000,000
Permanent differences (PD) $(32,500) $(27,500)
PBT +/- PD $767,500 $972,500
Tax on PBT after PD $168,850 $204,225
Effect of change in tax rates on beginning deferred tax (Note 1) $ (2,240)
Tax expense $168,850 $201,985
Note 1: A 1% reduction in tax rate leads to a reduction in tax expense. Beginning cumulative taxable
temporary differences was $224,000. With the reduction in tax rate, future tax payable is reduced and
a write-back can be made of the beginning deferred tax liability of $2,240 (i.e. 1% * $224,000)