Question

Net loss before taxation is ($10,500). A number of items in the profit and loss account have to be treated differently for tax purposes.

	Accounting Records	Taxation Records
Interest income earned but not yet received	9,000	Nil
Impairment of goodwill	15,000	Nil
Transfer to long service leave provision	8,000	Nil
Depreciation of machinery	20,000	15,000
Transfer to allowance for doubtful debts	4,500	Nil

An extract from the balance sheet at balance day reveals:

Assets	Carrying Amount	Tax Base
Plant and machinery - at cost	100,000	100,000
Accumulated depreciation	- 20,000	- 15,000
Goodwill (net)	35,000	Nil
Accounts receivable (net)	46,000	50,000
Interest receivable	9,000	Nil
	170,000	135,000
Liabilities
Provision for long service leave	5,000	Nil

Additional information:

(1) Income earned $9,000 will not be included into taxable income until it is received.

(2) An item of machinery costing $100,000 is being depreciated using the straight line method at 20% for accounting purpose and at 15% for taxation purposes.

(3) An amount of $3,000 for long service leave paid has been charged against the provision. This amount can now be claimed as a taxation deduction.

(4) A bad debt for $500 has been written off against the allowance for doubtful debts. This amount can now be claimed as a taxation deduction.

(5) Income tax rate is 30%.

Required:

(a) A statement of taxable income.

(b) All necessary general journal entries to record income tax expense and the tax effect of temporary differences. Present your workings for temporary differences in a table

(c) The general journal to transfer income tax expense to profit and loss account.

(d) The general journal entry to transfer net profit after tax to retained earnings.

Answer 1

Statement of taxable income:

Net loss before tax			-10500
Interest Income			-9000
Impairment			-15000
Provision			8000
Depreciation			5000
Allowance			4500
Allowance paid			-3000
Bad Debts			-500
Taxable Income			-20500

Journal entries for recording income tax expense:

1. P&L A/c Dr.(9500*.30)    2850
       To Provsion for tax       2850

2..Deferred tax Asset a/c[(15000+8000+5000+4500)*.30 9750
     To P&L 9750

3.P&L A/c Dr 3750
To Deferred Tax Asset[(500+3000)*.3] 1050
   To Deferred Tax Liability(9000*.3)         2700