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Hi,
I’m struggling to understand this question from one of the acca speciment papers:
Peach Co is preparing its financial statements for the year ended 30 November 20X9. Peach Co estimates its income tax expense as $145,000 for the year.
The trial balance shows a debit balance on the tax account of $22,000. This represents the balance after the prior year’s tax liability was paid.
What is the income tax expense in the statement of profit or loss for the year ended 30 November 20X9?
Its giving the answer as $167,000. Surely a debit balance on the tax account means that the state owes the company money, therefore balance should be 145,000 – 22,000?
The balance of $22,000 must be on the tax expense account (not the tax liability account because they have paid last years liability). So it means that last year they had not estimated as much as they should have done.
This year they will debit the tax expense account with the estimate for this year of $144,000 (and credit the tax liability account) and so the total expense in the SOPL will be $167,000 (this years estimate plus last years under-estimate).
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