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- June 21, 2018 at 3:45 pm #459622hagun527Member
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could you explain this question
“a company’s trial balance shows a debit balance of 2.1 million brought forward on current tax and a credit balance of 5.4 million on deferred tax. the tax charge for the current year is estimated at 16.2 million and the currying amount of net assets are 13 million in excess of their tax base. the income tax is 30%
what amount will be shown as income tax in the statement of profit or loss for the year”
the answer is 16.8 million
my question is: C/F deferred tax liability is 13*0.3=3.9 million
B/F deferred tax liability is 5.4 million
so deferred tax liability reduce 1.5 million
why the 1.5 billion goes into the credit side of the tax payable?
(debit side: 2.1+16.2=credit side 1.5+16.8)June 21, 2018 at 8:44 pm #459660P2-D2Keymaster
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To calculate the current tax expense I’d always draw up a T-account to make life easier. The opening balance would be debit of 2.1 million from the TB. The year-end estimate of 16.2 million is on the debit side too, ready to bring forward on the credit side next year for payment to be made.
When the T-account is balanced off we credit the T-account to close it and the debit is taken through profit or loss, and therefore there is an 18.3 million expense.
The reduction of the deferred tax liability will debit the deferred tax liability and credit the tax expense. If you net off the debit of 18.3 million and the credit of 1.5 million then you get the 16.8 million expense as the answer.
These questions appear frequently in a published company accounts question, so it is important to ensure that you are confident in how to get the answer.
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