Question

LCF Ltd is a company incorporated in Singapore and files tax returns with the Inland Revenue Authority of Singapore. In 2005, LCF Ltd has losses of $300,000 due to a temporary disruption in their factory. Prior to 2005, LCF had profits of $250,000 in 2004 and expected profits in subsequent years to exceed $500,000. Assuming there is no other taxable temporary difference, and LCF’s tax rate is 20%, which of the following journal entries best reflect the requirements under FRS 12 that optimizes LCF’s tax position?

(a)DR Tax Receivable $60,000
CR Tax income $60,000

(b) DR Tax Receivable $20,000 CR Tax income $20,000 DR Deferred Tax Asset $40,000 CR Tax income $40,000

(c)DR Deferred Tax Asset $60,000 CR Tax income $60,000

(d)DR Tax Receivable $50,000 CR Tax income $50,000

Answer 1

FRS 12 requires that deferred tax asset should be recognised when it is probable that taxable profits will be available against which the deferred tax asset can be utilised. Where an entity has a history of tax losses, an entity recognises deferred tax asset only to the extent that an entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available. Based on this the following journal entry best reflect the requirements under FRS 12 that optimises LCF's tax position

(c)DR Deferred Tax Asset $60,000
CR Tax income $60,000