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Entity B has a balance for interest receivable of $4,000 in its financial statements at 31 December Year 1. Interest is not taxed until it is received. The relevant tax rate is 30%.
Required
Calculate the deferred tax provision at 31 December Year 1.
Answer
The interest receivable of $4,000 is included in income in profit or loss for Year 1. However, it is not included in taxable profits for Year 1, which means that taxable profits in Year 1 will be higher by $1,200 ($4,000 × 30%).
Is it the taxable profits or the accounting profits which will be higher in year 1?
Surely the taxable profits will be lower than the accounting profits because the interest receivable will not be taxed until the year of receipt – or am I missing something?
Hi Sir,
I don’t think you are :).I quoted this from Emile Woolf text and i reached to the same conclusion which you just stated but was not confident that’s why posted here. Thanks for clearing the doubts.
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