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  1. avatar says

    Dear sir,
    I can’t understand the answer for Q2 of Mini exercise part 8 Taxation. Why do we deduct deferred tax from tax estimated? Can you give me an explanation for the answer?
    Thanks!

    • Profile photo of MikeLittle says

      The second line in the answer should read “Current tax 1,200″

      The question gives us the liability, not the tax charge. The 1,200 transfer from Deferred Tax is because we are reducing the deferred tax provision from 11,200 down to 10,000.

      In prior years we have charged Profit or Loss Accounts / retained earnings with 11,200 deferred tax (charged through the tax charge in the Profit or Loss)

      Now we decide that we didn’t need 11,200. We only need 10,000. So debit the deferred tax account and credit the current tax account. That has the effect of reducing the tax charge in this year’s Profit or Loss but has no affect on the Current Tax liability on the Statement of Financial Position

      • avatar says

        Now, i understand the movement of deferred tax, but i still not clear about the first line of the entry in the answer. If you debit 17100 tax account and then credit it 1200, then tax charge in the SoCI is 15,900. I think the tax charge should be 18700-400-1200=17100

        And the entry i would make is:
        Dr Tax charge 18300
        Dr Deferred tax 1200
        Cr Tax charge 1200
        Cr Tax payable 18300

        I don’t know if i do wrong somewhere. Can you correct me?
        Thanks!

      • Profile photo of MikeLittle says

        Did you read my previous post? In particular, did you read the first line?

        Your comment “still not clear about the first line of the entry in the answer”

        The first line of the answer does not say debit the tax account. It says debit the SoCI (or Statement of Profit or Loss if you prefer to call it that)

        The first line of my previous post says that the second line of the answer should not read “Cr SoCI Taxation” – it should read Cr Current Tax account (or Cr Current Liabilities if you prefer)

        That leaves me with a balance to carry forward on the Current Tax Account of 18,700 liability (given in the question) and a tax charge in the Statement of Profit or Loss of 17,100

        OK?

      • avatar says

        Yes, it is pretty much clear now. I’m sorry for not reading your post carefully, if i did, i would understand it sooner.
        Thanks you very much for the reply.

  2. avatar says

    Dear Mike,

    Request your guidance to understand how do we know the amount of deferred tax to be released in future years. In example 2, 100,000 was DT in 2009, then you released 50,000 each in 2010 and 2011 . why cant we release entire 100,000 in 2010. Thanks

    • Profile photo of MikeLittle says

      Because we’re comparing the company’s book value of their asset with the taxman’s value of their asset (comparing net book value with tax written down value)

      In year 2, according to the working shown at the top of page 177(!) the figures are $200,000 compared with a tax value of $zero

      The difference is now $200,000. Apply the tax rate to that amount and there is a deferred tax liability to carry forward of $200,000 * 25% = $50,000

      But we brought forward a deferred tax liability of 25% * $400,000 = $100,000

      Therefore we can release $50,000 of that $100,000 this year and next year we shall release the remainder

      Is that ok?

    • Profile photo of MikeLittle says

      Well, play it again! And again! There’s no limit to the number of times you can listen to the lecture.

      And, if there’s any particular point that you don’t understand, post your question on this site on the Ask the Tutor page and I’ll get back to you

  3. avatar says

    Hi,

    Please i need help with this question which goes thus:

    In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?

    will this result in any treatment as Non-current asset item?

    Thanks

    • Profile photo of MikeLittle says

      Is this an F7 question? If it is, it almost certainly will not appear in an F7 exam!

      In addition, I think that you have missed off one or two words.

      I’m not really sure what “In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?” means

      Are you sure that you have copied the question correctly?

      • avatar says

        Yea its an F7 question.

        What am trying to say is this:

        how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do treat the unrecoupable part as Non-current asset.

      • avatar says

        Yea its an F7 question.

        What am trying to say is this:

        how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do you treat the unrecoupable part as Non-current asset?

      • Profile photo of MikeLittle says

        Well (I don’t recognise this as any F7 question I remember seeing!) if the time for recovering the overpayment has passed the I imagine you will have to write off that over-payment. It cannot be an asset if the company can no longer recover it

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