Question

The following are all independent situations. Prepare the journal entries for deferred tax on the creation or reversal of any temporary differences. Explain in each case the nature of the temporary difference. Assume a tax rate of 30%.

1. The entity has an allowance for doubtful debts of $10 000 at the end of the current year relating to

accounts receivable of $125 000. The prior year balances for these accounts were $8500 and $97 500

respectively. During the current year, debts worth $9250 were written off as uncollectable.

2. The entity sold a vehicle at the end of the current year for $15 000. The vehicle cost $100 000 when purchased 3 years ago, and had a carrying amount of $25 000 when sold. The taxation depreciation rate

for equipment of this type is 33%.

3. The entity has recognised an interest receivable asset with a beginning balance of $17 000 and an

ending balance of $19 500 for the current year. During the year, interest of $127 000 was received in

cash.

4. At the end of the current year, the entity has recognised a liability of $4000 in respect of outstanding

fines for non-compliance with safety legislation. Such fines are not tax-deductible.

Answer 1

1. First and second item has resulted in the Temporary differences. please refer attached excel sheet for explanation in detail.

2. Third and fourth item does not result in any temporary difference. 3rd item is related to cash flow and 4th item is permanent difference.

Explanation for temporary differences,
Allowances are temporary in nature as they are allowed when actually written off. Hence results in DTA.
Carrying balance of fixed assets are allowed over the period of item as charge to profit of items as charge to profit and loss and depreciation