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ABC Co. pays local taxess in 10 monthly installments starting May each year. Local taxes for the year till March 31 20×1 were 18900. ABC is preparing financial accounts for the year ended 31 Jan 20×1.
what is the prepayment of local taxes till Jan 31, 20×1
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i am thinking ZERO. why?
When tax is estimated…. u
Dr Tax Exp
Cr Tax Liability.so every month starting may 20X0, u are paying 1890 till Jan.
Dr Tax LIability
Cr Bankif anything, you owe taxes on 31 jan
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please explain
The bill of 18900 is for the year ended 31 March X1. Only the period from 1 April X0 to 31 Jan X1 is an expense of this accounting period and is 18900 x 10/12 = 15750.
The cash paid during our accounting period is monthly payments of 1890 from May X0 to Jan X1 = 9 x 1890 = 17010
So as at 31 Jan X1 they have pre-paid 17010 – 15750 = $1260.
(You had better double-check my arithmetic 🙂 )
whew… this was very confusing… but i get it … april – march is the ta year right?
Eureka …. that is if i am correct.
i was thinking what was wrong with my argument. then i realized..this is local tax..not corporate tax where one has to estimate.
is that correct?
Yes – partly.
But also partly due to the fact that corporate tax would be calculated for the accounting period of the company rather than a different period as in this question.Sir
I got
18900 x 10/12 = 15750 for 1 year. but till 31 of March is not 10 months but 11.
as the year end in January so I got prepayment February and march.
from May to january
from May to January I got 15750/10*9=14175
so I got prepayment
15750-14175=1575.
but 1575 is for 1 month , but prepayment should be 2 months, still don’t understand as from May to January is 11 monthsThe prepayment is the difference between the cash paid in the period and the expense for the period – they are two different things.
The bill itself is for the year 1 April to 31 March. The expense for our period is the part of the invoice from 1 April to 31 January (our year end) which is 10 months. Therefore the expense is our Statement of profit or loss is 10/12 x 18900 = 15750, and the prepayment is 1260 as I explained earlier.
(In our next accounting period, the expense will be 2/12 x 18900 = 3150. We will already have prepaid 1260, and we have to make one more monthly payment of 1890. 1260 + 1890 = 3150)
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