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Hey Mike.
Iam having trouble in understanding how we come to the $17.1 figure in question 2 (Taxation – Mini Q: OT)
Could you please explain how do we get that figure?Open up two T accounts. One called deferred tax and the other called current tax.
Put in the figures given for the values brought forward paying GREAT attention to getting those figures on the correct debit / credit side.
The question will then give you either the “tax charge”, “the tax liability”, the “provision required for deferred tax” or details of the difference between the tax values compared with the carrying values of the company’s assets.
Ok, if it’s the tax charge, this goes into the credit side of the current tax account.
If it’s tax liability, this goes in the debit side of the current tax account above the total lines and on the credit side below the total lines.
If it’ the required provision, this goes on the debit side in the deferred tax account above the total lines and on the credi side below those total lines.
If it’s the detain of the difference, multiply that difference by the tax rate (given in the question) . Take that calculated figure and put it in the deferred tax account above the total lines and in he credit side below the total lines.
Balance off the deferred tax account and double enter that balancing figure into the current tax account – it could be either a debit or a credit entry in those accounts.
Now balance off the current tax account and the difference that you arrive at will be either the tax charge (needs to be debited to the Statement of Income) or the tax liability (shown as a liability on the Statement of Financial Position)
Does that make it any easier?
If not, post again
When we are crediting with income tax 1.2, does that mean we are crediting the current income tax account? And we already have 0.4 over there, so it adds up and we get 1.6..
Income tax liability 18.7 y/e 30 september 2008 should be on Cr or Dr side please? .. It’s a closing balance so Dr right?
I’ am so confused…I understand the deferred liability part, just confused what happens with the current tax account…
Yes, the 1.2 is credited to the current tax account and lifts the credits to 1.6
If the question says there’s a liability of 18.7, that figure goes in the current tax account ABOVE the total lines and is carried down in the same account to the credit side BELOW the total lines. Because it’s below the lines on the credit side, it’s a liability – and that’s what you wanted to reflect!
Now balance off and the figure is 17.1 and that represents the tax charge and is debited to the statement of income, immediately after profit before tax and immediately before profit after tax!
Ok now?
Thank you for your patience 🙂
So first it goes to the dr side above the total lines and then to the cr side below the total lines hence carrying it forward, Am I right?
Correct …. and the narrative above the lines is “carried down” or “carried forward” whereas below the line, the narrative is “brought down” or “brought forward”
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