Income tax

14Income Tax

INCOME TAX

Tax Reconciliation for the year ended

30 June 2016

Accounting profit before tax

Add: Provision for Doubtful debts

Add: Accounting Depreciation

Less: Depreciation for Taxation purposes

(1,050,000)

Less: Prepaid Insurance

(290,000)

Provision for Warranty

Provision for long service leave

Taxable Income

1,109,000

Tax at 30%

For accounting purposes depreciation will be $840,000 while for taxation purposes depreciation on property, plant and equipment will be $1,050,000.

According to AASB 112, states that deferred tax must be recognized for all deductible temporary differences that show future tax consequences of a business activity or any business event. Some of the assumptions for the determination of deferred tax include derivation of taxable income in future years and going concern concept. Assessable temporary difference causes an increase in future tax payables while deductible taxable differences causes a decline in future tax payables.

Deductible or Taxable temporary differences = Carrying amount of liabilities or assets — tax base of liabilities or assets.

Deferred tax asset or deferred tax liability = Deductible or Taxable temporary differences * Tax rate.

Carrying Amount

Deductible Temporary Difference

Taxable Temporary Difference

Tax Expense

Revaluation Surplus

Tax Payable

Cash/Bank

Receivables (Net)

1,270,000

(287,000)

Prepaid Insurance

(290,000)

Inventory

1,385,000

1,385,000

Property, Plant Equipment (Net)

3,360,000

3,150,000

Land (Net)

4,400,000

3,500,000

10,400,000

9,867,000

Liabilities

Accounts Payables

Provision for long service leave

(152,000)

Provision for Warranty Expense

(210,000)

Debenture Payable

2,365,000

2,365,000

3,902,500

3,960,000

Net Assets

6,497,000

5,907,000

Temporary difference for the year

1,110,000

Loss carried forward

Movement for the period

1,110,000

Tax effected at 30%

Tax on Taxable Income (30% * 1,109,000 )

Income Tax Adjustment

Journal entry for Revaluation of Land as at 30 June 2016

Revaluation Surplus

Revaluation Surplus

Deferred tax liability

Temporary difference due to Depreciation

Depreciation for purposes of tax is based on the original cost of the land; therefore, revaluation does not affect the tax base. Deferred tax liability arises when tax base is less than the carrying amount of an asset while deferred tax asset arises when the tax base is greater than the carrying amount of an asset.

Carrying Value

Temporary Difference

Property & Plant: Cost

4,200,000

4,200,000

Accumulated Depreciation

1,050,000

Journal Entry as at 30 June 2016

DR Income Tax Expense

CR Deferred tax liability

DR Income Tax Expense

CR Income Tax Payable

Journal entry for the period ended 30 June 2016

DR Income Tax Expense

DR Deferred Tax Asset

CR Deferred Tax Liability

CR Income Tax Payable

Then deferred tax asset and liability is set off in accordance to AASB 112, as indicated below

DR Deferred tax liability

CR Deferred tax asset

Reference

Australia Pty Ltd .6Ed Australian Financial Accounting .Accounting for income taxesMcGraw-Hill (2010),