Question 4.

13 Current and cleferreci tax and change in tax rate

The profit before tax, as reported In the statement of comprehensive income of Barl.le Frere Ltd
gl for the year ended 30 June 20 11 , amounled to $600000, including Ihe following revenue and
expense items: ()).
Rent revenue @ $ 30 000
Government grant received (exempt from tax) ® 10000
Sad debts expense ~ 60000
Depreciation of plant 0) 50 000
Long-service leave expense '!P 45000
Annual leave expense @ 30000
Office supplies used f1>,) 15000
Entertainment costs @ 18000
Depreciation of buildings ,~ 8000

The draft statements of financial position of the company at 30 June 2011 and 20 10 showed th e
following assets and li ab ilit ies:

2011 2010
As sets
Cash $ 80 000 $ 85 000
Inventory 170 000 155000
Receivables 500000 480 000
rJi) Allowance for doubtful debts (55000) (40000)
@ Of/ice supplies 25000 22000
Plant 500 000 500 000
Accumulated depreciation (260 000) (210 000)
Suildings 300000 300 000
Accumulated depreciation (148000) (140 000)
Goodwill (net) 70000 70000
Deferred tax asset ? 40500
Liabilities
Accounts payable 290 000 260000
(\3lLong-service leave payable 60000 45000
elY Annual leave payable 40000 30000
(J) Rent received in advance 25000 20000
Deferred tax liability ? 38100

e Additional illforillatioll
(a) Depreciat ion of buildings and entertai nment costs are not allowed as tax deductions. The

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governme nt grant revenu e is not assessable for tax purposes.
(b) Accumulated depreciation of plant for tax purposes was $3 15000 at 30 June 20 10, and
depreciati on for tax purposes for the year ended 30 June 20 11 amounled to $75000.
(c) Office supplies are claimed as a tax deduction when purchased.
(d) Assume a tax rate of 30% for the year ended 30 June 20 1 I.

, Required ,
A. Prepare a ·.~v·orksheet to calculate taxable income and the company's Clm'ent tax liability as at
. I
30 June 2011, and prepare an appropriate balance-day adjustment for tax,
I B, Prepare a worksheet to calculate the balance-day adjustments to deferred tax asset and lia-
:. bility accounts as at 30 June 20 11 , and show the necessary journal entry,
C, Assume that the govemment decided, after the election in August 2010, to change the income
tax rate for the year ended 30 June 20 11 from 30% to 35%. Show the impact of thi s on Ihe
journal entries prepared under requirements A and B, and prepare any additional entries that
may be required,
 /J2 £1 ( to rJ-f? )
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**QUESTION 4.13: Current and deferred tax and change in tax rate

A.BARTLE FRERE LTD Taxable Income for year ended 30 JUlie 2011

Accounting profit before tax $600000

Add
Bad debts expense 60000
Depreciation expense - plant 50000
Long service leave 45000
AlUlUalleave 30000
Office supplies used 15000
Entertainment 18000
Depreciation - buildings 8000
Rent received in advance 35000
861 000
Dedllct
Rent revenue 30000 @
Government grant received 10 000 ®
Depreciation expense of plant for tax 75000 .®
Bad debts written off 45 000 E,
Long service leave paid 30000 C
AlUlUalleave paid 20000 I)
Office supplies paid for 18000 E
228000
Taxable income 633000
CUtTent tax liability = 30% x $633 000 $189900

The appropriate journal entry is:

"fwY~'k\< (~ J'~' ~d::.-..A -t,.~ """ I) ( k<> M~ (l, H~ ' r6.)
r ··t~" " T'~ '" Income T ax xpenseE Dr 189900
CUtTen! Tax Liability . Cr 189900

Workings:
Allowance for Doubtful Debts
Accs Receivable e, 45 000 b Beginning balance 40000
Ending balance @ 55 000 . Expense ® 60000
100000 100000

Rent Received in Advance

Revenue ® 30000(J)1 Q:j Beginning balance 20000
Ending balance 25000 I Cash 35000 A
55000 55000
Lon Service Leave Pa able
Cash c· 30000 0 Beginning balance 45000
Ending balance '8> 60000 ® Expense 45000
90000 90000

AlUmal Leave Payable

Cash D 20 000 t8 Beginning balance 30000
Ending balance 18 40 000 @ Expense 30000
60000 60000
offle.. S- rP/.'<- ~
;2.'>' I<. (()'" E ® I,. I<-
1 8k. r8lc il, "2 5- k
 Plant fo.· taxation pu .. poses:

Carrying amount at 1 July 2010 ($500000 - 3 15000) $185000

Depreciation (75000)
Tax base at 30 June 2011 110000

B.
BARTLE FRERE LTD
Calculation of defe .... ed tax
as at 30 June 2009
Ca ....ying Taxable Deduct'ble Tax Base Taxable Deductible
Amount Amount Amount Temp Diffs Temp
Diffs
$ $ $ $ $ $
Assets
Cash 80000 - - 80000 - -
InventOlY 170000 (170000) 170000 170000 - -
Receivables 445000 (0) 55000 500000 55000
Supplies 25000 (25000) 0 0 25000
Plant 240000 (240000) 110 000 110 000 130000
Buildings 152000 (152000) 0 0 152 000
Goodwill 70000 (70000) 0 0 70000
Liabilities
Ales payable 290000 - - 290000
LSL payable 60000 0 (60000) 0 60000
Annual leave 40000 0 (40000) 0 40000
payable
Rent in adv 25000 - (25000) 0 25000
Total
temporary 377 000 180000
differences
Excluded 222000
differences
Net 155000 180000
temporary
differences I ~/.
DefelTed tax 46500 ~-
liability
Deferred tax 54000
asset -f\
Beginning
balances
ovV\

Po. ,.~, ~ 5" ~ -'(38100) "'(40500) oe, .f /0»

Movement -
during year
Adjustment 8 400Cr 13 500 Dr'

The journal entry required for the year ended 30 June 2011 would be:
Deferred Tax Asset Dr 13 500 ) offi-",-e-
Deferred Tax Liability Cr 8400 ) ,4.J\-S B /I ~
Income Tax Expflncome Cr 5 100 pi/ill>-

i r~ 'i p.), 0 TA
In~
 C.
As a result of a change in the tax rate, the company would need to restate the beginning
balances of the deferred tax asset and liability as follows :

Deferred Tax Asset Dr 6750

Deferred Tax Liability Cr 6350
Income Tax Exp/Income Cr 400
*$40 500 x 5/30
**$38 100 x 5/30

The current tax liability would now be recorded by the following entry (assuming that the
entry had not been made previously)

Income Tax Expense Dr 221 550

Current Tax Liability Cr 221 550
$633000 x 35%

The entry from the second worksheet would now appear as follows, as the change in tax rate
appears as a movement at the bottom of the worksheet:

Net 155 000 180000

temporary
differences
Deferred tax 54250
liability
(35%)
Defened tax 63000
asset (35%)
Beginning (38 100) (40500)
balances
Movement (6350) (6750)
during year
Adjustment 9800Cr 15750 Dr

Defened Tax Asset Dr 15750

Deferred Tax Liability Cr 9800
Income Tax ExplIncome Cr 5950