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I’ve watched the lectures and got all the chapter questions correct, plus the BPP revision kit. However, when tax is included in a section C question I’m less clear what to do.
Eg September 2016 Q.31 – There’s a Current Tax balance on the trial balance. I presume this is a SFP balance rather than an expense SPL balance(?). So a debit balance is an asset (overpayment last year) and credit balance is a liabilities (underpayment last year)?
If it’s a P&L balance then it’s the other way around. And then we need a current tax payable in the SFP plus Deferred Tax.
So the balance is deducted/added to the tax estimate for the year given. In Sep 2016 it’s debit so it’s 2.7m -0.7m? Then +/- the difference in Deferred tax?
New Deferred balance is 0.8m difference upwards. So is this added or deducted from the current tax?
I’m happy with the more complex adjustments but this minor tax adjustment is making my brain do loops.
Hi,
I always find if you use T-accounts then it becomes easier but that is more challenging these days with the format of the exam and it being online. The T-account we draw up is a combination of a SFP (tax payable) and SPL (income tax expense) account, which is unusual but easier to deal with.
Be careful with your understanding as the debit is an underestimate from the prior year and so we need to recognise the additional tax expense in this year’s accounts. The credit is an over estimate and so we will receive a reduction on the tax expense this year.
So in your illustration, the 0.7m will be added to the 2.7m to give 3.4m current tax expense. This will then be adjusted for the movement in deferred tax balance.
Hope that clears it up for you.
Thanks
Chris
Ok, so the Tax Balance from the extract is a SPL account line, the Tax Expense account. Rather than Tax Payable SFP account line (In the real world I’d be able to find out which type of account line it was – expense or asset/liability). T accounts definitely help.
I’m doing Q31 from Sep/Dec 18 so will put this into practice –
The tax is a credit (negative expense) so is an overpayment last year and will be deducted from this year’s tax expense. And the reduction in the deferred tax is a reduction in liability and expense.
D 2100 C 130 C 500 = 1470
I think I’ve cracked it, thanks for the help.
I was so ready for Tax and there were no questions.
I’ll be tackling SBR next so it won’t be wasted.
Odd that there was no tax, presumably there was no individual company accounts preparation.
Glad to hear you’re confident of moving on to SBR. The key there is to remember that the rules are all the same, it is just that the transactions that you apply the rules to are more complex in nature.
Thanks and best of luck with the next exams.
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