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Fruitz Co has a tax liability relating to 20X1 brought forward in 20X2 of $16,000. This liability is finally
agreed at $18,500, which is paid in 20X2.
Fruitz’s accountant estimates their tax liability for profits earned in 20X2 will be $20,000.
What should the charge for taxation be in Fruitz’s statement of profit or loss (SPL) for the year ended
31 December 20X2?
A $22,500
B $15,000
C $17,500
D $20,000answer:
The under provision for the previous year of $2,500 plus the provision for the current year of
$20,000 gives a charge to the SPL of $22,500.I think $22,500 includes 2,500 because tax liability for profits earned in 20X2 is $20,000. Why I should take 2,500 separately? thanks in advance.
In X1 they will only have charged 16,000 as an expense. Since the actual charge turned out to be 18,500, they really should have had an expense of 18,500 in X1.
However the X1 financial statements will already have been finalised and so it is too late to go back and change the figures for X1.So instead of changing things for X1, they correct the problem by charging the extra 2,500 this year (X2) instead. So the answer is correct and the full expense charged in X2 will be the 20,000 estimated for X2, plus the ‘correction’ of 2,500 (the amount undercharged in X1).
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