Accounting for income tax

Question 1

What is corporation tax based upon?

Answer 1

A tax on a companies taxable profits

Question 2

For corporation tax purposes what is a company and who are exempt from paying corporation tax?

Answer 2

a “company” is any corporate body. As well as limited companies.
Those who are exempt from paying tax include registered charities and registered pension schemes.

Question 3

What is the difference between tax avoidance ( and is it costly) and tax evasion?

Answer 3

‘Avoidance’ means reducing tax liability legally. ( tax avoidance is costly but overall there is tax savings)
• ‘Evasion’ means avoiding tax illegally, i.e.,
breaking the law.

Question 4

What is the problem with tax avoidance and evasion?

Answer 4

1) leads to lower corporate transparency, leading to uninformed decision maklng
2) the tax savings is transferred to the managers rather than shareholders

Question 5

What is tax haven?

Answer 5

TBA

Question 6

What are non-deductible expenses?

Answer 6

Depreciation, general provisions like doubtful debt, entertainment expense ( basically non cash transactions that allow for manipulation.

Question 7

What is non taxable income.

Answer 7

Income when you sold a Non current asset, it is non taxable lin the corperation tax, as it is taxed under capital gains tax.

Also dividends received from other companies ( tax authorites want companies to give dividends, hence dividends are non taxable. )

Question 8

What is capital allowance?

Answer 8

This is typically for plant and machinery. You have something called the annual investment allowance, this rate can vary depending on the year. So the tax authorites at the beginning of every yeat will say this years capital allowance will be so much e.g. lets say the threshold is £200000, this means if you buy any plant and machinery that is less than or equal to 200000, there is no tax on it.

Question 9

What is clear to understand about taxable profit(LOSS) and accounting profit(loss) ?

Answer 9

THEY ARE NOT THE SAME. Accounting profit includes accrual accounting, whereas taxable profit excludes it ( Profit before tax + non deductible expenses - Non taxable income - capital gains)

Question 10

What is the formal definition of Accounting profit ( loss)

Answer 10

profit (loss) for a reporting period before

deducting tax expense. ( revenue - expenses)

Question 11

What is the formal definition of Taxable profit (loss)

Answer 11

profit (loss) upon which income taxes are payable (recoverable), determined in accordance with the rules established by the tax authorities. ( differences in tax rules in countries

Question 12

What is the true difference between Accounting profit( loss ) and taxable profit.

Answer 12

As tax rules in your country might vary from accounting rules applied in your company, there will be some differences in the 2, there might be expenses recognised in accounting profit ( e.g. government grant income) , which cannot be recognised for taxable profit.

Question 13

What is Tax expense (tax income)

Answer 13

the total taxes included in the determination of net profit (loss), including current tax and deferred tax.

Question 14

Who is the tax authority in the UK?

Answer 14

HMRC

Question 15

If companies are making losses for a couple years, what can they do to there taxes?

Answer 15

they can recover the losses against the profits they pay in the future years but only up to a certain number of years.

Question 16

When we arrive a taxable profit from accounting profit What is current tax?

Answer 16

Dr income tax expense

Cr Tax liability.

Question 17

Any adjustments necessary to reflect underestimates or

overestimates of current tax in previous periods should…

Answer 17

be included in the tax expense for the current period.

Question 18

Any current tax that arises from a transaction or event
which is recognised in other comprehensive income
should(e.g. revaluation reserve, any taxes related to this if the unrealised gain is sold ….

Answer 18

also be recognised in other comprehensive

income.

Question 19

What is deferred tax?

Answer 19

The estimated future tax consequences of transactions and events in the financial statements of the current and previous periods.

Question 20

WHAT IS IMPORTANT TO REMEMBER ABOUT DEFFERED TAX?

Answer 20

IT is just an accounting entry, we do not adjust the tax payable balance

Question 21

Why does deferred tax arise?

Answer 21

Because accounting profit(loss is not equal to taxable profit. ( tempoary difference)
SO you might have an expense that goes through your profits, but that might not be taxable till some point in the future.

Question 22

If there is a permnanent ( one off) difference between in accounting and taxable profits ( what goes through permanent difference will never be taxed or allowed within taxable profit) then is there a future tax consequence?

Answer 22

NOO DEFERED TAX CONSEQUENCE.

Question 23

When there is a temporary difference ( so differences in accounting rules and taxable profit rules, e.g. if i have an expense i will expense it on an accrual basis, then the the tax legislation with give detail on how its taxed, or if income is recorded on an accrual basis, but when we look at income being taxed, as taxable computation is done on cash basis, it isn’t included. However when we do receive money in the future there will be a future tax consequence ( it will be taxed in the next accounting period. So will there be a deferred tax consequence?

Answer 23

Yes there will be

Question 24

Some of the income or expenses or assets or liabilities in an entity’s FSs for a
reporting are
– treated differently by the accounting principles compared to the tax
principles, and/or
– may be dealt with for tax purposes in a different period.
Fill in table to see how they are treated differently
( the first 2 are temporary differences and the last is a permanent difference )
LOOKING AT THIS WHAT IS THE DEFINITION FOR DEFFERED TAX)

Answer 24

Deferred tax accounts for temporary differences in the accounting and taxable rules, that is treated in the future period.

Question 25

What is the actual formula for Deferred tax which will be broken up?

Answer 25

Temporary tax difference ( which can be deductible or taxable x tax rate = Deferred tax liability or asset).

Question 26

What are the 2 temporary differences and what is it a relationship off ?

Answer 26

Taxable temporary difference
Deductible temporary difference

It is a relationship between Carrying amount - tax base

Question 27

What is a Taxable temporary difference, will it increase taxable profit in the future and why?

Answer 27

This is when the carrying amount ( cost - Acc dep) > tax base (cost - acc. tax deprecation) , this gives rise to a deferred tax liability. This will increase taxable profit in the future because we have claimed large tax depreication early in the assets life, hence there will be less to claim in the future, hence we will be paying more tax, as there is less of a future allowance.

Question 28

What is a Deductible temporary difference will it increase taxable profit in the future and why??

Answer 28

This is when the carrying amount ( cost - Acc dep) < tax base (cost - acc. tax deprecation) , this gives rise to a deferred tax asset. Tax base is higher because you haven’t claimed as much capital allowances/ tax deprecation uprfront, so you will claim more of them later, hence you pay less tax, hence savings ( asset)

Question 29

What is a tax base?

Answer 29

represents the amount at which the asset or liability would be recorded in a tax-based balance sheet in comparison to carrying amount ( book value)

Question 30

If the tax base of an asset or liability is not the

same as its carrying amount,…

Answer 30

this is evidence of a temporary difference and a deferred tax adjustment is required.

Question 31

( Hard long process) What is the tax base of an asset?

Answer 31

Asset = future economic benefits

1) identify the future economic benefit represented by the carrying amount of the asset)
2) Are the future economic benefits taxable when realised
3) if the economic benefit of the asset is not taxable then the tax base = carrying amount. ( HENCE DEFFERED TAX IS 0 )
4) if future economic benefits of assets are taxable then we will have deferred tax. If the carrying amount of an asset > tax base then this is a taxable temporary difference. ( you have to pay more taxes If the carrying amount of an asset < tax base then this is a deductible temporary difference. ( you pay less taxes )

Question 32

Answer 32

Taxable

Question 33

Answer 33

Deductible

Question 34

So in income statement for income tax what 2 components do we have?

Answer 34

We have current tax and deferred tax( which matches the temporary differences, but as a present obligation future payment

Question 35

Formula for temporary differences and deferred tax ?

Answer 35

Question 36

(TAX BASE OF ASSET) A machine which cost £50,000 is shown at its
carrying amount of £15,000. For tax purposes, its
written down value is £10,200. The machine’s
residual value at the end of its useful life is
expected to be zero.
Assuming a tax rate of 19%, calculate the amount
of the deferred tax liability or asset which should
be shown in the statement of financial position in
relation to each of the assets.

Answer 36

Question 37

( TAX BASE OF ASSET) Trade receivables are shown at £58,000. The
revenue to which these relate was included in
taxable profit for the year to 31 December 2018

Answer 37

Question 38

Interest receivable is shown at £4,500. This interest
has been included in accounting profit but will not
be taxed until it is actually received. It will then be
fully taxable.

Answer 38

Question 39

( Hard and long process ) What is the tax base of a liability? ( opposite that of an asset.

Answer 39

1) Identify the future outflow of resources
2) Is the future outflow tax deductible in the future, if yes then the tax base = carrying amount - future tax deductions. Then there is a DT adjustment
3) If the future outflow is not deductible, then the carrying amount = tax base.
If the carrying amount of a liability > than its tax base then we have an example of a dedutible temporary difference .
if the carrying amount of a liability < than its tax base then we have an example of a taxable temporary difference .

Question 40

Current liabilities include accrued expenses of
£6,500. These expenses have already been
deducted when computing both accounting
profit and taxable profit.

Compute the tax base of each of the liabilities
and determine whether a temporary difference
exists with respect to it. If so, state whether this is
a taxable temporary difference or a deductible
temporary difference.
• Assuming a tax rate of 19%, calculate the amount
of the deferred tax liability or asset which should
be shown in the statement of financial position in
relation to each of the liabilities.

Answer 40

Question 41

Current liabilities include further accrued
expenses of £5,000. These expenses have been
deducted when computing accounting profit but
will not be deducted for tax purposes until they
are actually paid.

Compute the tax base of each of the liabilities
and determine whether a temporary difference
exists with respect to it. If so, state whether this is
a taxable temporary difference or a deductible
temporary difference.
• Assuming a tax rate of 19%, calculate the amount
of the deferred tax liability or asset which should
be shown in the statement of financial position in
relation to each of the liabilities.

Answer 41

Question 42

Answers: at the end of 2017
• The asset’s carrying value ____________.
• Tax base is _________________.
• Taxable temporary difference ____________.
• Deferred tax _______________

Answer 42

At the end of 2017, the asset has a carrying
value of £1,000 (cost - AD) but its tax base is only £800
(cost £1,500 – depreciation £700 for tax
purposes).
• There is a taxable temporary difference of
£200 ( carrying amount - tax base CA> TB) , giving rise to a deferred tax liability of
£38 (19% x £200).
In SoFP,
DT liability = £38.
• Setting up this liability increases the tax
expense for 2017 by £38. In IS, DT expense =
£38.
DR( increase) Tax expense £38( IS/SOCI)
CR ( increase) Deferred tax liability £38 ( SOFP)

Question 43

Answers: at the end of 2018
• The asset’s carrying value ____________.
• Tax base is _________________.
• Taxable temporary difference ____________.
• Deferred tax _________________.

Answer 43

At the end of 2018, the asset’s carrying amount is
£500 ( cost £1500- AD 1000) but its tax base is only £200 (cost £1,500 –
depreciation £1,300 for tax purposes).
• The taxable temporary difference is £300, giving
rise to a deferred tax liability of £57 (19% x £300).
In SoFP, DT liability = £57. ( REMEMBER THE ENTRY IN SOCI IS DIFFERENT TO SOFP as in SOFP you put £57, whereas SOCI you put £19
• This is £19 more than the liability which was set
up in 2017, so £19 must be transferred to the
deferred tax account, increasing the tax expense
for 2018 by £19. In IS, DT expense = £19.
Dr( Increase) Tax expense £19 ( IS/SOCI)
Cr ( Increase) Tax liability £19 ( SOFP)

Question 44

Answers: at the end of 2019
• The asset’s carrying value ____________.
• Tax base is _________________.
• Taxable temporary difference ____________.
• Deferred tax _________________.

Answer 44

At the end of 2019, the asset’s carrying value ( cost £1500 - AD £1500
and tax base ( Cost £1500- AD for tax purposes £1500) are both zero.
• There is no temporary difference so the £57
deferred tax liability from 2018 is no longer
required.
• Transferring this £57 back from the deferred
tax account reduces the tax expense for 2019
by £57. In IS, DT expense = (£57).

Question 45

How does the statement of comprehensive income look like?

Answer 45

( so the total tax expense doesn’t rise, we are just applying matching principle)
In the final year its a reversal of the liability.

Question 46

Riza Ltd’s statement of financial position has recorded an equipment with a carrying amount of £480,000. For tax purposes, this equipment’s written down value is £560,000. The residual value of the item at the end of its useful life is expected to be £nil.

Riza Ltd pays tax at 19%, the resulting deferred tax asset or liability is:

Select one:

Deferred tax liability of £80,000

Deferred tax asset of £80,000

Deferred tax asset of £15,200

£nil

Deferred tax liability of £15,200

Answer 46

The tax base of the equipment exceeds its carrying amount by £80,000. This is evidence of a deductible temporary difference. The resulting deferred tax asset is £15,200 (19% of £80,000).

Question 47

Amis SARL’s financial statements for the year to 30 April 2018 show a pre-tax profit of €450,000. This is after charging depreciation of €110,000. Depreciation for the year for tax purposes was €170,000. Assuming that the rate of tax paid by Amis SARL is 28%, the required transfer to or from the company’s deferred tax account is:

Select one:

A transfer of £16,800 from the deferred tax account

A transfer of £47,600 from the deferred tax account

A transfer of £16,800 to the deferred tax account

A transfer of £47,600 to the deferred tax account

Answer 47

Taxable profits for the year are €60,000 less than accounting profits and this is caused by a temporary difference. Therefore £16,800 (28% x €60,000) is transferred to the deferred tax account.

The correct answer is: A transfer of £16,800 to the deferred tax account

Question 48

Answer 48

Question 49

Why must A deferred tax asset must be recognised for a deductible
temporary difference if it is probable that this temporary
difference will be utilised in the future.

Answer 49

Needs to be checked because company is getting income.

Question 50

What are 2 arguments for deferred tax?

Answer 50

1) Deferred tax achieves income smoothing by smoothing the tax provision due to timing difference.
2) The entity is a going concern, so will
continue to pay tax.

Question 51

What is 1 arguments against Deferred Tax?

Answer 51

1)Actual tax charge is objective and the best way to determine management’s success at running the business and managing tax affairs. ( accounting just makes things blurry and confusing)