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Prepayment of Tax

Forums › ACCA Forums › ACCA FA Financial Accounting Forums › Prepayment of Tax

  • This topic has 7 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • August 4, 2014 at 8:38 am #180683
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    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

    —————————

    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

    August 4, 2014 at 11:16 am #180730
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    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 🙂 )

    August 4, 2014 at 11:27 am #180735
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    whew… this was very confusing… but i get it … april – march is the ta year right?

    August 4, 2014 at 1:34 pm #186310
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    Thats right 🙂

    August 4, 2014 at 3:09 pm #186345
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    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?

    August 4, 2014 at 4:20 pm #186369
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    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.

    August 6, 2014 at 6:53 pm #186711
    josy87
    Member
    • Topics: 173
    • Replies: 215
    • ☆☆☆

    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 months

    August 7, 2014 at 6:47 am #186810
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    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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