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Dear sir,
I couldn’t understand why the tax base in the following scenario is 0 (I think it should be 10k as this is the taxable amount in the future, with a DTL of 10k), can you please help look into this?
“… statement of PnL showed interest income receivable of $55k, but only $45k of this had been received by the year end. Interest income is taxed on a receipts basis.”Thank you!
regards
Lmoh sorry, but I was actually referring to a practice question in the BPP revision kit, so I’m not sure if it would be helpful to give you the reference number? Also, I couldn’t copy the text of the question into this forum. sorry. but do you feel something is wrong with that as well?
If needed, I can try to type the question by hands…cheers
Lmdear sir,
Please find below the full question and the answer provided by BPP which I typed by hands. I was referring to point 3.
thanksLm
53. Preparation question: Julian
Julian recognized a deferred tax liabiity for the year end 31 Dec 20×3 which related solely to accelerated tax depreciation on PP&E at a rate 30%. The net book vlaue of the PP&E at that date was $310,000 and the tax written down value was $230,000.
The following date relates to the year ended 31 Dec 20×4:
1) At the end of the year the carrying value of PP&E was $460,000 and their tax written down value was $270,000. During the year some items were revalued by $90,000. No items had previously required revaluation. In the tax jurisdiction in which Julian operates revaluations of asset do not affect the tax base of an asset or taxable profit. Gains due to revaluations are taxable on sale.2) Julian began development of a new product during the year and capitalised $60,000 in accordance with IAS38. The expenditure was deducted for tax purposes as it was incurred. None of the expenditure had been amortized by the year end.
3) Julian’s statement of profit or loss showed interest income receivable of $55,000, but only $45,000 of this had been received by the year end. Interest income is taxed on receipts basis.
4) During the year, Julian made a provision of $40,000 to cover an obligation to clean up some damage caused by an environmental accident. None of the provision had been used by the year end. The expenditure will be tax deductible when paid.
The corporate income tax rate recently enacted for the following year is 30% (unchanged from the previous year).
The current tax charge was calculated for the year as $45,000.
Current tax is settled on a net basis with the national tax authority.Required:
a) Prepare a table showing the carrying values, tax bases and temporary differences for each for the items above at 31 Dec 20×4.
b) Prepare the statement of Profit or loss and statement of financial position notes to the financial statements relating to deferred tax for the year ended 31 Dec 20×4.ANSWER:
a) carrying amount($’000) Tax base($’000) Temporary difference
PP&E 460 270 190
Development expenditure 60 60
Interest receivable (55-45) 10 10
Provision (40) (40)
———-
220b) Note to the statement of financial position
Deferred tax liability $’000
At 1 Jan 20×4 [(310-230)*30%] 24
Amount charged to Profit or loss (balancing figure) 15
Amount charged to equity (90*30%) 27
——
At 31 Dec 20×4 (20*30%) 66Note to the statement of profit or loss
income tax expense
$’000
current tax 45
Deferred tax 15
—-
60just realized that the format of what I typed is lost, so just to clarify the answer to point3, the provided answer has it:
Interest receivable (=55-45)
carrying amount (10)
Tax base (0)
Temporary difference (10)thanks
LmThanks for your marathon efforts Lm. Let’s hope I can clear your head of any remaining confusion!
Here’s your original question again:
“I couldn’t understand why the tax base in the following scenario is 0 (I think it should be 10k as this is the taxable amount in the future, with a DTL of 10k), can you please help look into this?
“… statement of PnL showed interest income receivable of $55k, but only $45k of this had been received by the year end. Interest income is taxed on a receipts basis.””Ask yourself “How much of that $60 development expenditure is allowable this year?” Answer – $Nil
Ask yourself “How much of the provision is allowable this year?” Answer – $Nil
Ask yourself “How much of that $10 interest receivable is taxable this year?” Answer – $Nil
Ask yourself “What’s the tax base of the development expenditure, the provision, the interest receivable?” Answer?
Is that any better?
thank you sir, just still a bit puzzled about the receivable part (sorry, it must be a very stupid question from me …) I thought tax base is about what is taxable in the future, not the current tax year. so in the above scenario, 10k is indeed not taxable this year but is taxable in the future when cash is collected, following this logic, I thought the tax base is 10k… 😛
Lm
The calculation of what is taxable in the future can be effected by seeing what the carrying value is and deducting from that the amount that is taxable (or allowable) now and deducting that figure from the carrying value
Consider the third column in the question that you typed out and ask yourself yet another question “What is the common feature of all these figures in the third column?”
Maybe it’s your understanding of the heading of the second column that is causing the confusion “Tax base” Why not instead concentrate on the third column and put into that third column the amount of the carrying value that will be taxable / allowable in the future rather than in this year?
That should make it easier for you
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