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am trying to solve revision kit questions (BPP) but i found it confusing in which i can’t pass this chapter and move to other.
how ever, one of theses is MCQ saying: a company’s trial balance shows a debt balance of: $2.1m. brought forward on current tax and credit balance of $5.4m on deffered tax. the tax charge for current year is estimated at $16.2 and the carrying amounts of net assets are $13m in excess of their tax base. the income tax rate is 30%.
what amount will be shown as income tax in the statement of profit or loss for the year?
the answer is:
16.2 + 2.1 underprovision – adjust deffered tax (3.9-5.4=-1.5) = $16.8m
i didn’t understand what debt/credit of tax account brougt-forward means
and they are added/ deducted
also i don’t know what they mean of charging a specific tax charge account. is it the final amount of tax of the year?
With reference to ‘i didn’t understand what debt/credit of tax account brougt-forward means’ I suggest that you watch John Moffat’s F3 video lecture on ‘balancing off the accounts’ – this is basic stuff that you should not be asking at F7 level and is vital that you understand the meaning and significance of brought forward, carried forward, trial balance …
Open 2 T accounts
Label them ‘Deferred tax’ and ‘Current tax’
In the deferred tax account, debit (not ‘debt’ as you have written) side, you have 3.9 narrative ‘carried forward’ (30% x 13)
On the credit side you have 5.4 narrative ‘brought forward’
Therefore you have a credit balance of 1.5 and to deal with that we must debit the deferred tax account and credit the current tax account with 1.5
In the current tax account, credit side, we have just put in the 1.5 transferred from the deferred tax account
On the debit side we have 2.1 narrative ‘brought forward’ and we have 16.2 narrative estimated tax liability for this year narrative ‘carried forward’
Therefore you have a debit balance of 16.8 and to deal with that we must credit the current tax account and debit the profit or loss account with 16.8
OK?
WATCH John Moffat’s F3 lecture on ‘balancing the accounts’!
Hello Mike
I didn’t understand why you debited with 16.2, I didn’t get the logic behind that . please do explain me about that
Thank youThe 16.2 is the estimated tax liability based on the profits for the year
OK? Now think! How do we record a liability?
How do we show a liability?
A liability is a credit balance, below the line, and therefore it appears of the statement of financial position
So, in your T account, show the double lines that you would write underneath the two total figures, and below the double lines on the credit side we need to show a figure of $16.2 with the narrative ‘brought down’
And that’s a liability because it’s below the double lines and it’s on the credit side
But you can’t just go putting figures into accounts willy-nilly! You have to abide by the rules of double entry
Ask yourself “Where has this 16.2 come from?”
And the answer is “Up a bit and left”
It’s come from above the double lines on the debit side with the narrative ‘carried down’
If you still can’t understand this, I have to recommend yet again that you watch John’s F3 lectures!
OK?
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