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FAPrepayment of Tax

Mmansoor12y ago
ABC Co. pays local taxess in 10 monthly installments starting May each year. Local taxes for the year till March 31 20x1 were 18900. ABC is preparing financial accounts for the year ended 31 Jan 20x1. what is the prepayment of local taxes till Jan 31, 20x1 --------------------------- 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 Bank if anything, you owe taxes on 31 jan ------------------------------------------------------ please explain
John MoffatJohn MoffatTutor12y ago#1
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 :-) )
Mmansoor12y ago#2
whew... this was very confusing... but i get it ... april - march is the ta year right?
John MoffatJohn MoffatTutor12y ago#3
Thats right :-)
Mmansoor12y ago#4
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?
John MoffatJohn MoffatTutor12y ago#5
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.
John MoffatJohn MoffatTutor12y ago#6
The 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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