Mini Exercises 8 Taxation

Open 2 T accounts – the first called “DT” and the second called “CT”

Put in the opening figures – you’ll find them in the trial balance, probably, though it’s possible that there is only one figure for taxation in the trial balance

Beware to put the figures into the correct sides of the T accounts ie BEWARE the debit value in the current tax line of the trial balance

A figure in the debit column of the trial balance goes in the debit side of the relevant T account and conversely a credit figure in the trial balance goes in the credit side of the relevant T account

An exam question will typically give you two pieces of necessary information:

1) the examiner will tell you by what value the carrying value of non-current assets exceeds the tax base for those assets and will, somewhere in the question tell you the applicable tax rate (all information needed for the deferred tax calculation)

2) the examiner will likely tell you the estimated tax liability calculated on this year’s taxable profits

1.1 Start with the deferred tax calculation – multiply the difference between carrying value and tax base by the tax rate. This gives you the deferred tax liability (very rarely a deferred tax asset!) to carry forward

1.2 Put that figure into the DT account on the debit side

1.3 Balance off the DT account and double enter the balancing figure to the appropriate side of the CT account

1.4 The only matter to be careful of is where the examiner may say that “Of the deferred tax liability, (say) $2,000 relates to the revaluation gain mentioned in (say) note ii above”. In this situation, before you balance off the DT account, you need to credit the DT account with that $2,000 and double entry the $2,000 in the debit side of the Revaluation Reserve

2.1 You have just entered into the CT T account the other side of the double entered balancing figure from the DT account

2.2 The examiner will likely have told you what is the estimated current liability for tax calculated on this year’s taxable profits

2.3 Take that figure of estimated liability and enter it into the CT T account, debit side

2.4 Now balance off the CT T account and double enter the missing / balancing figure to the statement of profit or loss because that figure is this year’s tax CHARGE

When you were balancing the two T accounts, you found the missing figure that made the two sides of the T account balance.

If that missing figure needed to go into the credit side (of the DT account, say) then the double entry would be to the debit side of the CT account

In both T accounts you have recorded the tax liability and, in both situations, that liability has been entered into the T account on the debit side

Add up both debit and credit sides of both accounts, put in the total figures on both sides of both accounts, double underline all four total figures and then, on the credit side of both accounts bring down to below the total lines the liability that you entered into the debit sides above the totals

I should not need to be writing this out – this is F3 stuff!

All clear?

You’re welcome

Well, all you needed to do was ask!

There are only 5 practice questions! Are you making your own up?