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  1. Hello,

    Can somebody help with this one?

    For the year ended 31/12/2011 a company made taxable trading profits of $1200000 on which income tax payable is on 20%.
    -A transfer of $20000 will be made to the deferred taxation account. The balance on this account was $100000 before making any adjustments.
    -The estimated tax on profit for the year 2010 was $80000, but tax has now been agreed at $84000 and fully paid.
    -Tax on profits for the year 2011 is payable on 1 May 2012.
    -In the year 2010 the company made a capital gain of $100000 on the sale of some property. This gain is taxable at 20%.

    1-Calculate the income statement tax charge in the 2011 accounts.
    2-Calculate the tax liabilities in the SoFP 2011

      • Yes sir, I saw the points. I’m still confused on why it is deducted from the revaluation reserve. Is deferred tax deducted from revaluation reserve i.e. revaluation reserve is presented net off tax?

        Thank you for your prompt reply sir.

      • To increase a provision in the Deferred Tax account ie increase the value of the debit entry with the narrative “Balance carried forward”, it is necessary to have a credit entry in respect of that increase in deferred tax – ie, the liability that will arise upon the event of disposal of the revalued asset

        Normally, the movement in the Deferred Tax account is balanced off to the Current Tax account and the balance now on the Current Tax account will then be debited (probably) to the statement of profit or loss

        But that’s inappropriate when dealing with revaluations. The Deferred Tax account will be credited thus giving an increase in the liability in that account to carry forward but, instead of the corresponding debit going to the Current Tax account, that debit now goes to the Revaluation Reserve

        Better?

      • Much better sir. Thanks a lot.
        Me and my friends(15 of them) whom i introduced to your lecture were all waiting for the reply haha. We really appreciate the way you teach.

  4. Jurgita’s profit from operations before royalty income is $700,000 per annum. In 2009 she was entitled to a one off royalty receipt of $60,000, which she eventually received in 2010. Income tax is 25% Extracts from Statement of Profit or Loss and Other Comprehensive Income 2009 2010 $’000 $’000 Profit from operations 700 700 Royalty receivable 60 760 700 Income tax @ 25% on taxable profits (175) (190) Profit after tax 585 510
    Taxable profits
    $’000 $’000 Profit from operations 700 700 Royalty received – 60 700 760 Income tax @ 25% 175 190 Show how the entity provides for deferred tax on the temporary timing difference.

    Question: why should the $60 000 royalty received be added to the $700 000 profit from operation to calculate the income tax in 2005 but not in 2004, the year the company accounted for it?

  5. Hi,
    Can i leave IAS 12 and IFRS 9 ?
    Can they come as a full fledged scenario in Section B ?

    They are way too complicated for me :/
    If they can’t be tested in section B, i won’t give them much attention.

    • Beside the fact that it stimulates investment to new assets as you said in 9:26 of your lecture but you see that it increases profit,so i i would think is an income like revaluation gain.

  8. Greetings Mr. Little.

    In example 2 Andris buys an asset at the beginning of 2009 for $600 000. It has a useful life of three years and is scrapped at the end of its useful life. its profits over the next three years are:
    1,800 (2009), 2,300 (2010), 2,500 (2011).

    A first year tax allowance of 100% is available on this asset.
    The tax rate for Andris is 25%.

    Question : When calculating deferred tax for 2009, the book value is $400 000 and the tax value is 0 due to the first year 100% allowance. The deferred tax liability is therefore $100 and you release this over the next two years to write it off. But the book value in 2010 is $200 000, which gives a deferred tax liability of $50 for 2010. What happened to the deferred tax liability for 2010? i do not see where you wrote it off.

    Your assistance will be deeply appreciated as usual sir.

    • The movement in the dferred tax account is double entered to the current tax account

      That account in turn is balance off with the missing figure geeing double entered to the statement of profit or loss

      Does that answer you?

      It was fortunate that I saw this question – I rarely look at “latest comments”. In future, if you want to be sure that I answer your questions, post them on the “ask ACCA tutor” page

  9. How do I treat under/over provision of taxes? I know that over provision is always on credit side of trial balance, so do I deduct over provision and add under provision of tax in profit or loss statement?
    Thank you.

  11. Hello,
    Can anyone help me with this question?
    -“-“-
    For the year ended 31 july 2011 Norman made taxable trading profit of $1200000 on which income tax is payable at 30%..
    a) A transfer of $20000 will be made to deferred taxation account. The balance on this account was $100000 before making adjustments for items listed in this paragraph.
    b) The estimated tax on profits for the year ended 31 July 2010 was $80000, but tax has now agreed at $84000 and fully paid.
    c) tax on profits for year 31 July 2011 is payable on 1 may 2011.
    Required:
    1) tax charged for 1 may 2012
    2) tax liability in sfp at 31 july 2011

      • In the Deferred Tax Account:

        Debit side:

        Carry down the balance of $120,000

        Credit side:

        Brought down balance of $100,000
        Transfer to Current Tax Account $20,000

        In the Current Tax Account:

        Debit side:

        Transfer from Deferred Tax Account $20,000
        Cash paid $84,000
        Carry down liability $360,000

        Credit side:

        Brought down liability $80,000
        Current year tax $384,000 to SoPoL

        So that was my answer.

        But I have serious doubts about $20,000 transfer TO the deferred tax account.

        I have interpreted this as an increase in the deferred tax balance but it could equally well be a decrease. If it is intended to be a decrease, then the double entry to record that $20,000 would be Debit Deferred Tax Account $20,000 and Credit Current Tax Account $20,000

        This would change the balance to carry forward in Deferred Tax Account to $80,000 and would change the charge to the Statement of Profit or Loss to $344,000 ( the $360,000 would remain the same)

        Ok?

  12. also please explain that if the DT is calculated by calculating the difference between CA less tax base then are we taking the FV in the revaluation example 3.
    (FV – Tax base) *rate% i.e (800-500)*30%

    why don’t we take the CV for calculating the temporary difference.
    I am so confused by reading the article on DT lol… they took the CV for the revaluation example

  14. 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!

    • 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

      • 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!

      • 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?

      • 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.

  15. 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

    • 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?

    • 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

  17. 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

    • 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?

      • 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.

      • 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?

      • 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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