OT Practice Question online tests

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

“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?

“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?

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?

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?