D10Q2 – Tax

Dear Mike,

I will appreciate if you could read my below understanding of the tax question and suggest if my interpretation is right or not.

Q – As per Trial balance dated 30/9/10:
Deferred tax – 4000K Cr balance.
Current tax – 900K Dr balance.

Note: A provision for income tax for the year ended 30 September 2010 of $5·6 million is required. The balance on current tax represents the under/over provision of the tax liability for the year ended 30 September 2009. At 30 September 2010 the tax base of Cavern’s net assets was $15 million less than their carrying amounts. The movement on deferred tax should be taken to the income statement. The income tax rate of Cavern is 25%.

Before I jump into my answer, if we just look at the TB ( without going onto the notes), Def. tax account has 4000K Cr, means it is effectively an income for the year and a deferred tax asset/ negative deferred tax liability, isn’t it?

My answer:

1stly We have to have a provision for the yr end for Current tax liability of 5.6 million. Since, we don’t have a provision in the TB, means we got to create one, therefore we will include deduct 5.6 million from the SOPL as C.tax of 5.6 million and and show the same as C. tax liability in the SOFP.

2ndly $900K C. tax expense shown on the TB was included in the last years provision, hence we don’t have to add it to the provision all over again, we just expense it in this year.

3rdly This years D.tax expense is 15m X 25% = 3750K, however in the TB we recognized it as 4000K income. hence, we will add the 3000K the income statement as D. tax expense and reduce 4000K from it (effcetively reduce net amount of 250K). On the other hand, will replace the 4000K in the liablity with 3750K.

Theferefore over all,

(Before adjustment),
In SOPL, tax expense = 4000 – 900 = 3100.
In SOFP, D. tax liability = 4000.

(After adjustment),
In SOPL, tax expense = 5600 + 900 +3750 – 4000 = 6250.
In SOFP, D. tax liability = 3750, C. tax liablity = 5600.

Am I getting the right picture?