Question

Cameron Ltd has profit before tax of $500 000 before taking into account the following items:

(a) The company has an accounting profit on instalment sales of $80 000. However, for tax purposes only the collected amount of $20 000 is included in taxable income.

(b) The company has accounting depreciation of $100 000 (carrying amount of the asset at the end of the period is $520 000) and tax depreciation of $150 000 (tax base of the asset at the end of the period is $370 000). The tax rate is 30%.

Required

Calculate the income tax expense and show all the general journal entries necessary to record income tax using the tax-payable method.

Answer 1

Calculation Of Income tax expense

Profit Before tax	500000
Less : Deferred tax	63000
Current tax	150000
Profit after Tax	287000

Calculation of Deferred tax Liability
Sales (80000-20000)	60000
Depriciation ( the temporary difference is the difference between carrying amount of asset & its tax base of the asset which is original cost less deductions =520000-370000)	150000
TOTAL DEFERRED TAX LIABILITY	210000
DEFERRED TAX	63000

Journal Entries

1) Statement of Profit& loss a/c Dr. 150000

To Current tax A/c 150000

(Being provision of current tax made)

2) Statement of Profit & loss a/c Dr. 63000

To Deferred tax a/c 63000

(Being deferred tax liability created )