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Could you please help with following, I spent so much time trying to get to the core:
EXAMPLE:
A company ’ s financial statements show profit before tax of $1,000 in
each of years 1, 2 and 3. This profit is stated after charging
depreciation of $200 per annum. This is due to the purchase of an asset
costing $600 in year 1 which is being depreciated over its 3 year useful
economic life on a straight line basis.
The tax allowances granted for the related asset are:
Income tax is calculated as 30% of taxable profits.
Apart from the above depreciation and tax allowances there are no other
differences between the accounting and taxable profits.
Required:
Year 1 $240
Year 2 $210
Year 3 $1501)Accounting for deferred tax, prepare statement of profit or
loss and statement of financial position extracts for each of
years 1, 2 and 3.(end of the example)
I am following your technique of 4 steps as shown in example 3 p 59, then compare what they write with regards to SPL:
Statement of profit or loss extracts:
1 2 3
Profit before tax 1,000 1,000 1,000
Tax (300) (300) (300)
Profit after tax 700 700 700am I write that they don’t show all those deferred tax and movements you are illustrating, because we don’t have Tax base and Caring value information? then is it right that we will not be able to calculate deferred tax for SPL if we don’t have that data ?
Sorry, I would like to add that I understand that for SFP we have:
Y1 Y2 Y3
Tax 288 297 315
Def.tax 12 3 -15Following your instructions i can do following:
SPL
Y1 Y2 Y3
PBT 1000 1000 1000
Current tax -288 -297 -315
DT movement 12 -9 18As you see my movements dont give smooth 700 profit figures.What is wrong?
Hi,
How does your answer compare to the answer to the question you are attempting? Is your current tax correct? Is your deferred tax correct? If they aren’t then that will be where you are making the mistakes. You cannot just look at the final figures and see they’re wrong, you need to dig further into the answer to see where you’ve gone wrong.
Once you’ve found where the mistakes have been made, then let me know and I can explain further.
Thanks
Thanks for replying,
Step1 – find temporary difference
we don’t know TD because we are given profit figures
so we move toStep2 – position
position is TD * tax rate, but we don’t know TD
however we can directly calculate deferred tax by
comparing Profit on accounting base (1000 per year) and taxable
profit:
Y1 Y2 Y3
Profit accounting base 1000 1000 1000
Taxable profit 1200-240=960 1200-210=990 1200-150=1050
Tax 960*0,3=288 990*0,3=297 1050*0,3=315Tax paid on accounting base 300 300 300
Tax paid on taxable base 288 297 315
Deffered tax asset or liability -12 -3 15
liabilit liability assetSPL
Profit before tax 1000 1000 1000
Incom tax expense -288 -297 -315
Deferred tax -12 -3 15
Profit 700 700 700Here I can not understand, why in your example do movements refer to SPL and
here to SFP ?SFP
Noncurrent liabilities: DT -12 -15 0
movement -3 movement +15Current liabilities : Tax -288 -297 -315
Hi,
You can calculate the temporary differences. You’re given the cost of the asset ($600) and the amount of depreciation charged each year ($200).
You can then work out the tax base using the same cost of the asset and the tax allowances given in the question. If you use these then you’ll be able to follow the steps more closely.
Thanks
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