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Hello,
I have a question about page no 99 of notes and lecture: between 12-14 minutes.
1. Is my thinking correct that tax written down value of an asset is 0 because there is 100% capital allowance in year 2004 ? What would happen if capital allowance was only 50% ?? How the figure would look like in 2005 and 2006 for this kind of scenario ?
I am struggling to understand how to determine the tax base of an asset.
2. If def tax liability was 100 and it was recognised in 2004, why do we release only 50 in 2005 and 2006 instead of releasing the whole 100 in 2005 ?
3. Why the 600 tax allowance applies only the the year 2004 and not to the subsequent years in the example?
Thank you.“tax written down value of an asset is 0 because there is 100% capital allowance in year 2004”
Correct
“I am struggling to understand how to determine the tax base of an asset”
This is the value attributable to the asset that is available to be relieved against tax in the coming years
“If def tax liability was 100 and it was recognised in 2004, why do we release only 50 in 2005 and 2006 instead of releasing the whole 100 in 2005”
This extract from the answer on page 190 explains that
“The temporary difference in this example is the difference between the carrying value of down value after deducting the tax allowances.”
“Why the 600 tax allowance applies only the the year 2004 and not to the subsequent years in the example”
Just how many times do you believe that you can claim 100% tax relief on a single asset?
Hi Mike,
Thank you for your explanation. However, I still struggle with answer to my question no 2.
I understand that NBV is 400 – less tax written down value which is 0 (because we got allowance of 600). Financial Statements show an asset of 400 so we will need to pay tax when the asset is recovered/sold in the future hence there is a deferred tax liability of 100 in 2004.
In 2005 this deferred tax is released (DT Def Tax Liab in SOFP 100, CR P/L Def Tax Expense100). So why it shows (50) ?
In 2006 there is no temporary difference so why it also shows (50) ?
Could you show me double entries for this transaction?
Thank you for help in advance.
Roland“In 2005 this deferred tax is released (DT Def Tax Liab in SOFP 100, CR P/L Def Tax Expense100). So why it shows (50) ”
No – at the end of 2005 there has been a second year of depreciation so the book value is now down to $200
Tax written down value is still $Nil so the temporary difference is now $200
$200 @ tax rate of 25% is $50
The deferred tax balance brought forward was $100 and we need to carry forward $50 so $50 goes through the income tax charge within the Statement of Profit or Loss for 2005
You are correct that in 2006 there is no difference so the $50 deferred tax balance brought forward is now written off through the income tax charge within the Statement of Profit or Loss for the year 2006
Double entries?
2004
Dr Current tax 100
Cr Deferred tax 1002005
Dr Deferred tax 50
Cr Current tax 502006
Dr Deferred tax 50
Cr Current tax 50OK?
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