OT Practice Question online tests

Chapter 19 Q.3 I can’t clearly understand the double entry for taxation:(. Can you kindly explain to me why the 70 of deferred tax is debited to the current tax please? Moreover can you explain what exactly goes to the credit and debit of deferred tax and current tax, how exactly does the double entry works in current and deferred tax and explain me the concepts since I can never get one right with reasoning?

Chapter 26 Q.1 Re the below explanation of the answer, I haven't understood why didn’t we take 30% of 800,000 (new capitalisation for this year) x 2months divided by 12 months (Pro-rata on capitalised expenditure). Thank you so much in advance.

Chapter 18, Q4. Why is the $280 taxation charge for the year credited to Current tax? Didn’t we always debited it to Current tax in all other questions? Q.5 Why have be debited the $700 twice in the curren tax debits (700 separate and 700 included in the 1,500) I am assuming that the 1,500 is the increase in the deferred tax from last year and not the cash paid right? Here I am talking through the answer to question 3 Deferred tax debits: 6,750,000 is the liability to carry forward into next year. When a balance is to be carried forward as a liability, it is shown ABOVE the total lines on the debit side and BELOW the total lines on the credit side In this question we do not need to calculate the deferred tax provision because the figure of $6,750,000 os given Often a question will say that the carrying value of the assets is greater than their tax base by, say, $10,000,000 and will go on to tell us that the current rate of company tax is, say 22% So we need to apply that percentage to the difference between carrying value and tax base to find the provision necessary to carry forward - in the example it would be 22% x $10,000,000 = $220,000 Deferred tax credits: 2,600,000; 3,750,000; 400,000 The 2,600,000 is the provision from last year brought forward. It is the last year equivalent of this year's 6,750,000 and the figure is shown either by way of note, as in this question, or as a figure on the trial balance (if it's that type of question) 3,750,000 is given in the question as the deferred tax liability on the property revalued during the year. This amount will be debited to the revaluation reserve because the revaluation gain has been credited to the revaluation reserve and we're now matching the tax on that revaluation gain with the gain itself That's why this 3,750,000 is debited to the revaluation reserve and credited to the deferred tax. If we hadn't credited deferred tax with this 3,750,000, the deferred tax provision of 6,750,000 would have been 3,750,000 less 400,000 is the "missing ", balancing figure in the deferred tax account It's the figure necessary to put into that account in order that both sides of the account will add to the same total But we need to double enter it Think about this 400,000. It's the amount by which we need to increase the tax charge going from the current tax account to the statement of profit or loss, so the double entry to the debit side of the current tax account will have the effect of increasing the tax charge entry in that current tax account Current tax debits: 400,000; 19,400,000 The 400,000 is the double entry for the 400,000 just transferred from the deferred tax account 19,400,000 we are told in the question is the estimated liability for the charge for current year tax. This is the provision that we need to make. It is NOT he figure that will go into statement of profit or loss. It IS the figure that will appear on the statement of financial position as a current liability As with the deferred tax provision, we need to debit 19,400,000 ABOVE the total lines and credit the same figure BELOW the total lines Current tax credits: 800,000 This is the amount brought forward from last year's tax maneuverings. This year we are carrying forward the 19,400,000 as described above BEWARE - sometimes this figure from the trial balance for current tax is a debit in the trial balance! Last year we will have done the same - we would have brought forward a liability for our estimate of current tax. Let's say that figure had been $18,000,000 During the course of this year that has just ended, we have been in negotiations with the tax man and we have settled on an amount to be paid this year that has just ended of 17,200,000 (we overestimated last year's liability). At the end of this year, a trial balance will have been extracted and, when we come to the current tax account, we find a credit balance on that account of 800,000 (18,000,000 credit brought forward and 17,200,000 debit being the payment of the tax leaving a credit balance of 800,000) A question will say "the balance of the current tax account represents the under / over provision of tax from last year" IGNORE THAT SENTENCE! You don't need to know whether it's an underpayment or an overpayment. YOU DON'T NEED TO KNOW OK, back to the current tax account. We've got the debits (Current tax debits: 400,000; 19,400,000) and we've got the credits (Current tax credits: 800,000) so now we can balance off the account and we find a missing, balancing figure of 19,000,000 which goes into the credit side and is debited to the statement of profit or loss because it's the amount of tax that we need to reduce this year's profits by It's called the "tax charge" and is NOT to be confused with the "estimate of this year's tax" which is the tax provision Tax charge is debited to statement of profit or loss and credited to current tax account Estimate of the tax on current year's profits is another way of saying "the provision required for this year's tax is ..." and is the provision necessary to debit above the total lines and credit below the total lines Now Marylise, that was a detailed explanation of how deferred tax and current tax is accounted for so there should be no need for me to answer your 4 questions This post should have put you in the position from whence you can confidently attack all similar questions There are one or two small variations but, with a little thought, you should be able to work those out Try it and, if you're still unsure, post again

"Chapter 26 Q.1 Re the below explanation of the answer, I haven’t understood why didn’t we take 30% of 800,000 (new capitalisation for this year) x 2months divided by 12 months (Pro-rata on capitalised expenditure)." Extract from the question: "...was destined for success and be extremely profitable when it is launched early in 2014" The project is still in development stage so it's inappropriate to start amortising the capitalised expense

Ohh wow got them all right :DD thanks for the brilliant explanation. You're a life saver. Don't know how could I have ever understood it without your help.

That's good to know that you're on top of this now :-)

Sep 15 examiners report MCQ: Jetsam Co entered into a lease for an item of plant on 1 April 20X0 which required payments of $15,000 to be made annually in arrears. The fair value of the asset was estimated at $100,000 at the inception of the lease and Jetsam Co's cost of borrowing is 8%. The lease was for a three- year period and the plant's estimated economic life was ten years. What amount should he charged to profit or loss relating to the lease for the year ended 31 December 20X0? The Ans is $11,500 (15,000 x 9/12 months). When it is an operating lease, there would be no inclusion for a proportion of borrowing costs as a provision in the P&L please?

"...for a proportion of borrowing costs as a provision in the P&L please?" Maybe you mean finance lease interest when you mention "borrowing costs" If you have used that expression instead of "borrowing costs" you would have seen more clearly that, yes, there is no finance lease interest to include in an operating lease agreement

Specimen paper Sep 16 Q24. Why did the question only take loss of plant and did not include profit/loss on property and equipment? Since I did 1,750 loss on plant, 1200 profit on factory and 950 loss on equipment. Specimen paper of 2014 Section B Q2: point i) Square had an unrecorded deferred tax liability of $1million, which was unchanged as at 30 September 2014. The 1million would not be deducted from Square’s retained earnings?

In Cash flow, Revaluation would be ignored right? Moreover, I need help in how to tackle a consolidated question, since I am doing a mess with my workings and getting lost. What is the best approach and format to tackle them? Should I write the double entries effected in each point and then start working for not missing anything out? Thank you in advance.

"Specimen paper Sep 16 Q24. Why did the question only take loss of plant and did not include profit/loss on property and equipment? Since I did 1,750 loss on plant, 1200 profit on factory and 950 loss on equipment." I have no idea where you've found $950,000 loss on equipment The question asks for impairment loss on the property, plant and equipment Surely the factory is land and buildings "Specimen paper of 2014 Section B Q2: point i) Square had an unrecorded deferred tax liability of $1million, which was unchanged as at 30 September 2014. The 1million would not be deducted from Square’s retained earnings?" At 1 October, 2013 there was an unrecorded deferred tax liability of $1 million At 30 September, 2014 there was still an unrecorded deferred tax liability of $1 million So, no change then! Why would you want to take anything to statement of profit or loss? Open a T account and pretend that this deferred tax position has been recorded On the credit side we have an amount brought forward as at 1 October, 2013 $1 million On the debit side we have an amount carried forward as at 30 September, 2014 of $1 million Balance off the account and take the missing figure to the Current Tax account How much have you taken to the Current Tax account?

"In Cash flow, Revaluation would be ignored right?" No, we cannot ignore revaluations Agreed, they don't appear within the cash flow itself But, if you ignore them, you're going to get your balancing figure that represents "additions to PPE" wrong Watch my video lecture on cash flows and you'll see that I emphasise in red "Beware" the revaluation reserve "Moreover, I need help in how to tackle a consolidated question, since I am doing a mess with my workings and getting lost. What is the best approach and format to tackle them? Should I write the double entries effected in each point and then start working for not missing anything out?" The marks are in the workings! There's no need for full journal entries Something like "TNCA +" or "TNCA ...." with an arrow upwards "Cash -" or "Cash ...." with a down arrow If you do your workings in the same sequence as I do them in lectures, in course notes, in the videos ..... you can't get lost! "and then start working for not missing anything out?" Not sure what you mean by this :-(

Re“Specimen paper Sep 16" Q.24 I have brought the 950 from The loss of Onerous contract ( 850 + (200/2)) :/ Doesn't the factory fall under Property in this case? :/ or the profit of $1,200 on factory is not taken into consideration since it is the expected selling price and thus not yet earned, thus we ignore it?

June 13 Past paper section B Q2 point v It tells you: On 1 July 2012, Atlas made and recorded a fully subscribed rights issue of 1 for 4 at $1.20 each. Immediately before this issue, the stock market value of Atlas’s shares was $2 each. Ans:The rights issue of 20 million shares (50,000/50 cents each x 1/5) at $1.20 has been recorded as $10 million equity shares (20 million x $0.50) and $14 million share premium (20 million x ($1.20 – $0.50 Shouldn't the total shares be divided by 4 and not by 5 please?

Understood the last question I asked you on June 13, its because it's the year end balance of shares and not the balance at the start of the year .. thx anyway :)

"the lessor has stated that they will accept $850,000 if paid on 30 October 20X3 as a full settlement. Penalty payments, due to the non-completion of supply contracts, are estimated to be $200,000, 50% of which is expected to be recovered" These are not impairments of property, plant end equipment! And, no, a building is not included (in this example) in property, plant and equipment A factory building is different in nature than a machine for filling tin cans (for example) (However, I could foresee a question where a building WAS included within PPE - sorry) The profit on the factory set against the loss on the plant would result in a net figure of (1,200 -1,750) = $(550) .... I could forgive you for that, but I imagine that, because the examiner has specified separately the plant from the factory .... ("The factory’s plant had a carrying amount of $2·2 million, but is only expected to sell for $500,000, incurring $50,000 of selling costs. The factory itself is expected to sell for a profit of $1·2 million") .... then it's expected that you would treat them separately with a minimum of netting off / offsetting OK?

"On 1 July 2012, Atlas made and recorded a fully subscribed rights issue of 1 for 4 at $1·20 each. Immediately before this issue, the stock market value of Atlas’s shares was $2 each." You write "Shouldn’t the total shares be divided by 4 and not by 5 please?" If there are 50,000 shares in issue AFTER a 1 for 4 rights issue, how many shares were in issue BEFORE the 1 for 4 rights issue? If I started with 4 then I finish up with 5 OK?

June 15 Past Paper section B Q3 point V What is Lease premium exactly please, and why is it split between Current and Non Current assets? Is a premium payment always an asset and a Premium Received always a liability and to be split between Current and Non Current please?

Lease premium is the EXTRA amount over and above the "normal" lease instalments It's paid to the lessor in order to secure the contract - it helps to ensure that the property isn't leased to someone else If you credit cash with the lease premium, that means that the other said must be a debit That debit is either an asset or an expense Assets are converted into expense over the life of the asset (depreciation, impairment, amortisation, usage, passage of time) A lease premium has (in this case) a four year life At the end of the first year 1/4 has been "used up" and expensed Another 1/4 is to be used up in the next 12 months, so it's like a prepayment that will be consumed within the next year The remaining 2/4 will not be consumed until more than 12 months ahead, so that 2/4 is a deferred expense and is shown in "long term assets" OK?

Brilliant thanks. And if for example the premium would be paid back by the lessor to the lessee by the end of the lease, how would it be accounted in that case?

It wouldn't be treated as an expense Instead it would be shown as a receivable (non-current) until received But why would that happen?

Throughout the years, is the government grant debited in deferred income and credited through P&L please, and is the deferred income split between current and non-current liabilities accordingly?

OT Practice Questions pg 276 Q.12 Is the ranking in the last calculation done starting with the one who earns the least earnings, thus in this case it would be options since is nil, followed by the loan which has 3,528 please? In the notes Chap 21, Example 5, when doing the rankings, why did we deduct the $900,000 from discontinued operations, thus leaving us with a balance of $9,100,000? Could we leave it at 10m, thus we do the extra working of the diluted EPS i.e. 10m/3.5m = $2.86? Thank you in advance :P

"Throughout the years, is the government grant debited in deferred income and credited through P&L please, and is the deferred income split between current and non-current liabilities accordingly?" Yes and yes "Is the ranking in the last calculation done starting with the one who earns the least earnings, thus in this case it would be options since is nil, followed by the loan which has 3,528 please?" Calculate the marginal earnings per share of the potential extra shares and rank them in most dilutive first sequence So options will always be first because there are never any potential extra earnings so far as concerns the option-related shares "why did we deduct the $900,000 from discontinued operations, thus leaving us with a balance of $9,100,000" Because the 900,000 relates to earnings that will definitely NOT be achieved because the operation is discontinued so there's no point in considering earnings that surely won't exist when the dilutions take place Why do we do it? We do it because that's the way the IAS tells us to do it and because, if we don't do it, it means we lose marks in exams Does it make a difference? - yes, it can do So, as Nike would say, just do it

Dear Sir, I'd love to let you know that I have passed with a mark of 67. Thank you so much for all of your help. Keep up the good work. Regards, Marylise

Very well done Marylise, and thanks for letting me know :-) (I wonder if you would have let me know if you had not passed? An academic question really - there was never any chance that that was going to happen!) Anyway, again, well done. Onwards and upwards :-)