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The below extract is taken from the december 2012 exam of F7.
“The balance on current tax represents the under/over provision of the tax liability for the year ended 30 September 2011. A provision for income tax for the year ended 30 September 2012 of $7·4 million is required. At 30 September 2012, Quincy had taxable temporary differences of $5 million, requiring a provision for deferred tax. Any deferred tax adjustment should be reported in the income statement. The income tax rate of Quincy is 20%”Ok the provision of income tax for the year ended 30th September 2012 will be added to the current tax account I GOT IT.
But why the current deferred tax liability of $1m will be subtracted from the brought forward deferred tax provision of $1.2m,giving us a deferred tax liability of $200000 as at 30th september 2012 ?Why it,s not added up with the brought forward balance on deferred tax account ,why we are subtracting it and what is the rationale behind it?
Also why just the current year tax liability arising on the taxable temporary difference will appear in the non current liabilities in SFP and why the $200000 will be subtracted from the income tax expense in the statement of comprehensive income?“Quincy had taxable temporary differences of $5 million, requiring a provision for deferred tax”
What’s the position at the end of the year?
20% x $5 million … that’s the required deferred tax provision
How much do we already have in the deferred tax account? $1.2 million
But we only want $1 million
So we have $200,000 too much in there
So, debit the deferred tax account $200,000 to bring that $1.2 million down to $1 million and complete the double entry by crediting the current tax account with that $200,000
Open 2 T accounts … DT and CT
Put in the brought forward figures ($1,200 credit in DT and $1,100 debit in CT)
Put in the carry forward figures (20% x $5 million) $1 million on the debit side of DT carried down to the credit side of that same account and …
… $7,400 per question on the debit side of CT carried down to the credit side of that same account
Balance off the DT account and double enter the balancing figure to the CT account (debit DT $200,000 credit CT $200,000)
Balance off the CT account and take the missing figure $8,300,000 to the statement of profit or loss
OK?
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