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ACW2491 Financial Accounting

Semester 2 2016
Lecture Handout/Illustrative Examples
Topic 3: Accounting for Income Taxes: Current Tax Issues
Differences between accounting and income tax treatments
Accounting Treatment Income Tax Treatment
1. Depreciation Expense as per AASB 116 (IAS 16), Accelerated rates or higher/ lower
usually straight line straight line rates
2. Bad and Recognised as an expense when Deduction given when actually bad
doubtful debts regarded as doubtful
3. Employee AASB 119 (IAS 19) requires these items Deduction when paid
benefits – Long be accrued
service, etc
4. Rental costs Regarded as a prepayment until Deduction when paid
consumed
5. Rental revenues Regarded as a liability if received in Taxable when received in cash
advance
6. Interest Recognised when receivable or payable Taxable or deductible when received
or paid; interest paid is a deduction
regardless of whether it has been
capitalised or expensed for
accounting
7. Fines and Recognised when payable Not deductible
penalties
8. Goodwill Purchased goodwill recognised and Goodwill write-downs not deductible
subject to impairment testing
9. Entertainment Treated as an expense Not deductible
costs
10. Development Sometimes recognised as an asset and Deduction when paid
costs amortised under AASB 138 (IAS 38)
11. Foreign Exchange gains and losses recognised Tax calculated on related revenue or
currency as per AASB 121 (IAS 21) expense at initial establishment of
receivables the receivable or payable
12. Tax losses No recognition Allowed to be offset against future
taxable income
13. Insurance costs Recognised as an asset and charged to Tax deduction when paid
expense when consumed
14. Purchase of Recognised as an asset and charged to Tax deduction when paid
supplies expense when consumed
15. Installment Gross profit on sale recognised as per Portion of total profit is taxable as
sales normal sale; interest income recognised each installment is received
as each installment received
16. Product Recognised as a liability on sale of Deduction when warranty costs
warranties merchandise incurred

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ACW2491 Financial Accounting
Semester 2 2016
Lecture Handout/Illustrative Examples
Topic 3: Accounting for Income Taxes: Current Tax Issues
Illustrative Example : Practice Question 6.13 That’s All Right Ltd (parts A and B only)
The draft accounts of Glasshouse Ltd for the year ended 30 June 2017, which showed a profit before tax
of $22,240, included the following items of income and expense:
Accrual ATO/Cash
Government grant (exempt of tax) 5,000 -
Proceeds on sale of plant 23,000 23k
Carrying amount of plant sold 20,000 15k (a)
Impairment of goodwill 11,100 -
Bad debts expense 8,100 6.5k
Depreciation expense – plant 14,000 20 250 (b)
Insurance expense 12,900 10.7k
Annual leave expense 14,500 11k

The draft annual statements of financial position at 30 June 2014 and 2013 contained the following
assets and liabilities
2017 2016
Assets
Cash 6,000 18,000
Receivables 96,000 85,000
Allowance for doubtful debts (6,800) (5,200)
Prepaid insurance 3,400 5,600
Plant 140,000 170,000
Accumulated depreciation – plant (32,000) (28,000)
Goodwill 11,100 22,200
Deferred tax asset ? 9,540
Liabilities
Accounts payable 78,000 76,000
Annual leave payable 13,200 9,700
Current tax liability ? -
Deferred tax liability ? 3,780

Additional Information:
(a) For tax purposes the carrying amount of plant sold was $15,000
(b) The tax deduction for plant depreciation was $20,250. The accumulated depreciation on plant
for tax purposes was $40,250 (2016: $35,000) at 30 June 2017.
(c) In the year ended 30 June 2016, Glasshouse Ltd suffered a tax loss. At 1 July 2016 carry-forward
tax losses amounted to $16,900. That’s All Right Ltd recognised a deferred tax asset in respect of
these losses.
(d) Tax losses carried forward must be offset against any exempt income before being used to
reduce taxable income.
(e) The company does not set off deferred tax liabilities and assets and the corporate tax rate is
30%.

Required
A. What factors would Glasshouse Ltd have considered before recognising a deferred tax asset with
respect to the tax loss incurred in the year ended 30 June 2016?

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ACW2491 Financial Accounting
Semester 2 2016
Lecture Handout/Illustrative Examples
Topic 3: Accounting for Income Taxes: Current Tax Issues
B. Calculate and record the balance of any current tax liability for That’s All Right Ltd as at 30 June
2017 using an appropriate worksheet. Show all workings.
C. Determine and record the movement in deferred tax assets and liabilities for That’s All Right Ltd
for the year ended 30 June 2017 using an appropriate worksheet. Do not net off deferred tax
assets and liabilities.

Solution
PART A
 DTAs can only be recognised to the extent that future taxable income will be available against
which the unused tax losses can be offset
 If sufficient taxable income is expected then DTA of $5 070 ($16 900 x 30%) should be recognised

PART B
(1) Annual Leave paid
Annual Leave Payable
Leave paid 11 000 1/07/13 Opening balance 9 700
30/06/14 Closing balance 13 200 AL Expense 14 500
24 200 24 200
(2) Bad Debts written off
Allowance for Doubtful Debts
Bad debts written off 6 500 1/07/13 Opening balance 5 200
30/06/14 Closing balance 6 800 DD Expense 8 100
13 300 13 300
(3) Prepaid insurance
Prepaid Insurance
1/07/13 Opening balance 5 600 Insurance expense 12 900
Insurance paid 10 700 30/6/14 Closing balance 3 400
16 300 16 300

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ACW2491 Financial Accounting
Semester 2 2016
Lecture Handout/Illustrative Examples
Topic 3: Accounting for Income Taxes: Current Tax Issues
THAT’S ALL RIGHT LTD
Determination of Taxable Income
(for the year ended 30 June 2017)
Accounting profit before income tax $22 240
Add: Accounting expense
Carrying amount of plant sold 20 000
Impairment of goodwill (non-deductible) $11 100
Doubtful debts expense 8 100
Depreciation – plant 14 000
Insurance expense 12 900
Annual leave expense 14 500 80 600

Deduct: Allowable deductions


Carrying amount of plant sold (tax) 15 000
Impairment of goodwill (non-deductible) 0
Bad debts written off (2) 6 500
Depreciation of plant for tax 20 250
Insurance paid (3) 10 700
Annual leave paid (1) 11 000
(63 450)
Deduct: Accounting income
Proceeds on sale of plant 23 000
Grant revenue (exempt) 5 000 (28 000)

Add: Assessable income


Proceeds on sale of plant 23 000
Grant revenue (exempt) 0 23 000

Taxable income 34 390


Add back exempt income 5 000
39 390
Tax losses recouped (16 900)
Taxable income 22 490
Current tax liability @ 30% $6 747

Journal entry to record current tax:


Income Tax Expense $6,747
Current Tax Liability $6,747
(Recognition of current tax liability)

Income Tax Expense ($16,900 x 30%) $5,070


Deferred tax asset (DTA) $5,070
(Recovery of previous period’s tax loss)
*Note that in the year of loss, DTA was recorded (Dr DTA 5070 Cr ITE 5070)