Net loss before taxation is ($10,500). A number of items in the profit and loss
ID: 2411305 • Letter: N
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.
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
Explanation / Answer
Statement of taxable income:
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
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