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Florabundi Co’s trial balance at 31 December 20X8 included a credit balance of $3,400 on its tax liability account, having already settled the tax liability for the year ended 31 December 20X7 during the year. Florabundi Co estimated that its income tax charge arising on its profits for the year ended 31 December 20X8 at $67,900.
What amounts should be included in Florabundi Co’s financial statements for the year ended 31 December 20X8 in respect of tax?
Statement of profit or loss, Statement of financial position
A $67,900 tax charge, $67,900 tax payable
B $64,500 tax charge,$64,500 tax payable
C $64,500 tax charge,$67,900 tax payable
D $71,300 tax charge,$67,900 tax payableAnswer is C. I am unable to figure out how it is overprovision of tax.
The $3,400 showing as owing on the trial balance is before dealing with the current years tax charge. It means that at the end of 20X7 they provided too much as owing for tax (because the question says that during the year they settled the tax liability for 20X7).
Therefore the expense recorded in 20X7 was too high by $3,400. However we cannot now go back and change last year, and so this years tax charge in the SOPL is reduced by $3,400.
The estimate that the charge this year will be $67,900, so they will show this amount at owing in the SOFP, and the expense charged in the SOPL will be 67,900 – 3,400 = $64,500.
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