deferred tax

And what’s your answer? Or are you simply seeing if I can remember how to do it?

I get 16.8.

What do you get?

Well that’s ok, then.

But do make sure that your misunderstanding in the past is now gone and that you are 100% sure of picking up these easy marks

You’re very welcome to ask for whatever help you need in whatever F7 topic you struggle with

WATCH THE LECTURE!!!!

There’s a perfect illustrative example in the lecture

Please, watch the lecture and then get back to me if you need more

You’re welcome.

But, for future reference, the lectures are on the site so you can watch the topics as they are taught. There is very little in this life more frustrating than being asked a question where, if you had watched the lecture, that question would be totally unnecessary!

Imagine that we under-estimated last year’s liability as $15,000

Tax man recalculated it to be $18,300

We pay $18,300 9 months after our year end

(Dr Corporation Tax Account $18,300, Cr Cash Account $18,300)

3 months later we’re looking to balance our accounts and estimate again this year’s liability. So we take out a trial balance and ……oh! What’s this? A $3,300 debit balance on our Corporation Tax Account!

Ok?

You’re welcome

Ruth, try this

It’s a reply that I posted earlier to another student

It’s a detailed explanation of the practice question number 3 from chapter 18

Let me know if it helps (it should do!)

Here I am talking through the answer to question 3

Deferred tax debits: 6,750,000 is the liability to carry forward into next year. When a balance is to be carried forward as a liability, it is shown ABOVE the total lines on the debit side and BELOW the total lines on the credit side

In this question we do not need to calculate the deferred tax provision because the figure of $6,750,000 os given

Often a question will say that the carrying value of the assets is greater than their tax base by, say, $10,000,000 and will go on to tell us that the current rate of company tax is, say 22%

So we need to apply that percentage to the difference between carrying value and tax base to find the provision necessary to carry forward – in the example it would be 22% x $10,000,000 = $220,000

Deferred tax credits: 2,600,000; 3,750,000; 400,000

The 2,600,000 is the provision from last year brought forward. It is the last year equivalent of this year’s 6,750,000 and the figure is shown either by way of note, as in this question, or as a figure on the trial balance (if it’s that type of question)

3,750,000 is given in the question as the deferred tax liability on the property revalued during the year. This amount will be debited to the revaluation reserve because the revaluation gain has been credited to the revaluation reserve and we’re now matching the tax on that revaluation gain with the gain itself

That’s why this 3,750,000 is debited to the revaluation reserve and credited to the deferred tax. If we hadn’t credited deferred tax with this 3,750,000, the deferred tax provision of 6,750,000 would have been 3,750,000 less

400,000 is the “missing “, balancing figure in the deferred tax account

It’s the figure necessary to put into that account in order that both sides of the account will add to the same total

But we need to double enter it

Think about this 400,000. It’s the amount by which we need to increase the tax charge going from the current tax account to the statement of profit or loss, so the double entry to the debit side of the current tax account will have the effect of increasing the tax charge entry in that current tax account

Current tax debits: 400,000; 19,400,000

The 400,000 is the double entry for the 400,000 just transferred from the deferred tax account

19,400,000 we are told in the question is the estimated liability for the charge for current year tax. This is the provision that we need to make. It is NOT he figure that will go into statement of profit or loss. It IS the figure that will appear on the statement of financial position as a current liability

As with the deferred tax provision, we need to debit 19,400,000 ABOVE the total lines and credit the same figure BELOW the total lines

Current tax credits: 800,000

This is the amount brought forward from last year’s tax maneuverings. This year we are carrying forward the 19,400,000 as described above

BEWARE – sometimes this figure from the trial balance for current tax is a debit in the trial balance!

Last year we will have done the same – we would have brought forward a liability for our estimate of current tax. Let’s say that figure had been $18,000,000

During the course of this year that has just ended, we have been in negotiations with the tax man and we have settled on an amount to be paid this year that has just ended of 17,200,000 (we overestimated last year’s liability).

At the end of this year, a trial balance will have been extracted and, when we come to the current tax account, we find a credit balance on that account of 800,000 (18,000,000 credit brought forward and 17,200,000 debit being the payment of the tax leaving a credit balance of 800,000)

A question will say “the balance of the current tax account represents the under / over provision of tax from last year” IGNORE THAT SENTENCE! You don’t need to know whether it’s an underpayment or an overpayment. YOU DON’T NEED TO KNOW

OK, back to the current tax account. We’ve got the debits (Current tax debits: 400,000; 19,400,000) and we’ve got the credits (Current tax credits: 800,000) so now we can balance off the account and we find a missing, balancing figure of 19,000,000 which goes into the credit side and is debited to the statement of profit or loss because it’s the amount of tax that we need to reduce this year’s profits by

It’s called the “tax charge” and is NOT to be confused with the “estimate of this year’s tax” which is the tax provision

Tax charge is debited to statement of profit or loss and credited to current tax account

Estimate of the tax on current year’s profits is another way of saying “the provision required for this year’s tax is …” and is the provision necessary to debit above the total lines and credit below the total lines

Ruth, that should set you up for pretty much all the deferred tax questions

There are one or two little bits that may be asked that I haven’t covered, but if you apply some thinking to those little bits, you should be ok