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Hello sir. Please explain the difference between current tax payable and deferred tax?
Secondly why are we showing current tax payable on SOFP though the interest is always showed in SOPL? I’m confused!
Deferred tax is not examinable in Paper FA.
For both interest and tax, we show the expense for the year in the SOPL. In the SOFP we show whatever is owing at the end of the year.
With regard to tax, it is only at the end of the year that a business is able to estimate what the tax will be for the year and so they will not usually have actually paid it. So the tax charge for the year will appear in the SOPL but if it has not been paid yet it will be shown as owing in the SOFP.
In the Statement of Cash Flows we show the tax actually paid during the year (which will probably usually be the tax that was owing at the end of the previous year).
According to example 1 of chapter 14.
Once we know the profits at the year-end then we estimate the Tax expense in SOPL of $39000.
But we have Tax Payable of $30000 in 2007 and $20000 in 2008 respectively. This means that the tax expense of $39000 (out of which include the tax of $30000 of 2007 & $9000 of 2008)
However in actual we have paid tax of $49000 (30000 + 39000 – 20000) out of which we paid tax of $30000 belong to 2007 and $19000 of 2008.
Is that correct too?
I forgot to ask two more question. I hope you do not mind 🙂
1) When will we actually pay our tax payable of $20000 on SOFP?
2) Lastly please explain something about deferred tax?
The tax expense for the year ended 2008 is 39,000, the amount showing in the SOPL.
They were owing 30,000 at the end of 2007 and so if they had paid nothing at all during 2008 they would be owing 69,000 at the end of 2008. Since they are only owing 20,000 at the end of 2008 it means that they must have paid 49,000 cash during 2008.
In relation to your other 2 questions, the date of payment of tax depends on several factors which you will learn for Paper TX. It is not examinable for Paper FA.
I will not explain anything about deferred tax because it is not examinable for Paper FA as I wrote before. You will learn about it in Paper FA after having studied Paper TX and I am certainly not going to explain how tax is calculated in the Paper FA forum!
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