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On the first day of the accounting period Cold enters into a three-year lease for an asset that
has a cash price of $20,000. The asset has an expected useful life of 10 years. Cold has an
option to extend the lease after three years for a further two years on normal commercial
terms. Under the terms of the lease the rentals payable in the first year are $4,000 and
thereafter $2,000 per year. In the draft accounts an expense has been charged with the cash
paid and no asset or liability has been recognised.
In addition, given a tax rate of 30%, determine the deferred tax implications of the correct
accounting treatment if tax relief will only be granted on the cash payments.I dont understand the answer where it says we expense 1/3rd of 8k and the difference of 1333 should be taxed at 30% – why arent we expensing the 4k which we paid?
any advise is much appreciated
Hi
i think you should go through ias 17 again.as in operating lease even if lessee is paying unequal amount of rentals, they’ll still be charged on straight line basis.which is total expense divided by total lease term.also rentals are tax allowed in the year they;re charged to income statement on cash basis, so no temporary difference arises on rentals, but it will arise only in the case of deposit money of 2000.its the kplan mock i guess.as you have paid 4000 in the 1st year, out of which 2000 is the deposit money and remaining 2000 is the rental.so that deposit money will be spread over the total term of lease and expensed out each year along with rental payments.667 out of 2000 of the deposit money expensed out in the 1st year, remaining is a prepaid expense recognized as asset in balance sheet.dis amount as being paid in cash, has already been allowed by tax authority,means deducted already on cash basis from taxable profits.so we have already gained tax benefit from it.so tax base is nil(remember tax base of an asset is the amount that is allowable in the future for tax purpose).and deferred tax liability generated.as wen in future wen we will charge this asset to the income statement as expense, we won’t gain any tax benefit on it as benefit already availed.
‘…remaining is a prepaid expense recognized as asset in balance sheet.dis amount as being paid in cash, has already been allowed by tax authority,means deducted already on cash basis from taxable profits.so we have already gained tax benefit from it.so tax base is nil(remember tax base of an asset is the amount that is allowable in the future for tax purpose)’
I find difficult to understand tax base of assets.
If prepaid expenses are assets and cash receipts were already deducted – it means that no further deductions will occur in the future. Now according to Ias12:
-TB should equal to CA (Prepaid expenses have already been deducted in determining an entity’s current tax liability for the current or earlier periods-so future economic benefits will not be taxable) or
-Nil – as the amount that will be deducted in the future is 0. ???
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