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A company’s trial balance shows a debit balance of $2.1 million brought forward on current tax and a credit
balance of $5.4 million on deferred tax. The tax charge for the current year is estimated at $16.2 million and
the carrying amounts of net assets are $13 million in excess of their tax base. The income tax rate is 30%
What amount will be shown as income tax in the statement of profit or loss for the year?
A $15.6 million
B $12.6 million
C $16.8 million .. correct answer
D $18.3 millionCharge for year 16,200
Underprovision 2,100
Adjust deferred tax (W) (1,500)
Profit or loss charge =16,800Working
Provision needed (13m × 30%) 3,900
Provision b/f (5,400)
Reduce provision =(1,500)Income tax expense = current income taxes – overestimate of deferred income taxes from last year ( because it was not recorded in income tax expenses last year in P&L statement causing net income to be understated)
Income tax expense = 16,200 – [5,400 – (13m × 30%) ]
Income tax expense = 14,700can anyone tell me the reason why we have to deduct the amount of the (debit balance of current tax from the trial balance) ?
sorry added.
Charge for year 16,200
Underprovision 2,100
Adjust deferred tax (W) (1,500)
Profit or loss charge =16,800Because it was under-provided last year – ie it wasn’t deducted within last year’s taxation expense in last year’s statement of profit or loss so it’s added on to this year’s estimated liability and therefore also on to this year’s expense
OK?
1- but why we take it directly $2.1 from T.B. whithout having to compare it against any other figure. (actual – estimated)
while credit balance of $5.4 million on deferred tax, we take the difference of what actually is and what was estimated.2- what the scenario other than that it was a net(loss) so no tax expesnses were charged? what other than that ?
3- what if it was a credit balance ? what could be the scenario ?
Oh dear – have you tried the mini-exercises at the back end of the free course notes ?
There are 16 (?) examples from past exams of these calculations
May I ask that you work through those and then come back to me
In addition, if you look through past posts on this forum page, you’ll find detailed workings where I have set out the debits and credits for both deferred tax and current tax accounts
And this you MUST do – this topic is typically worth 4 – 6 marks in an F7 exam
Hi Mike, I listened to you, I tried solving the mini – exercises from opentution, It got more complicated. The answers lack the calculation, they put straight the number without writing how they arrived to the answer. for example this question below:
Question 2
Trial balance extract at 30 September, 2008
Income tax (credit balance) 400
Deferred tax liability 11,200
The balance of income tax in the trial balance represents the under/over provision of the previous year’s estimate. The estimated income
tax liability for the year ended 30 September 2008 is $18.7 million. At 30 September 2008 there were $40 million of taxable temporary
differences. The income tax rate is 25%. Note: you may assume that the movement in deferred tax should be taken to the Statement of
Profit or Loss.Answer 2
Dr DT 1,200
Cr CT 1,200
Dr P or L 17,100
Cr CT 17,100from where they brought the 1,200 ? how they calculated the 17,100 ? It is not helping me!
Deferred tax liability brought forward $11,200
Tax differences $40,000
Tax rate 25%
25% x $40,000 = $10,000
$11,200 – $10,000 = ????
FOLLOW THIS!!!
Open 2 T accounts, one for Deferred Tax and one for Current Tax
Put in the brought forward figures (F3 level book-keeping)
Put in the 10,000 carried forward figure in the deferred tax account and carry that figure forwards
Balance off the deferred tax account and double enter the missing figure into the current tax account
You’re given the estimated liability for this year based on this year’s results
Carry that figure down in the current tax account (F3 stuff, this. I’m embarrassed having to tell you!)
Balance off the current tax account and you’ll find the figure $17,100!
Try it! It’s easy!
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