Accounting for Taxation

Question 1

profits chargeable for corporation tax

Answer 1

income from all sources and capital gains less charges on income (eg. gift aid payments)

Question 2

The classical system

Answer 2

• company pays tax on its profits.
• shareholder suffer a second tax liability of the profits distributed to them
• dividend income is treated as a second and separate source of income

Question 3

The imputation system

Answer 3

• dividend regarded as a flow of the profits of each sale to individual shareholders.
• total tax paid by the shareholder and by the company is unaffected by the payments of dividends
• Australia and New Zealand alone use this system

Question 4

The partial imputation system

Answer 4

• only part of the underlying corporation tax paid is treated as tax credit.
• used by Canada and uk

Question 5

how to record corporation tax

Answer 5

DR - Tax expense - IS
Cr - Tax payable - SFP (current liability)

Question 6

Deferred tax assets

Answer 6

• the amounts of income taxes recoverable in future periods
• calculated by comparing the carrying amount of an asset/liability to its tax base

Question 7

records for carrying amount > tax base

Answer 7

Dr - Tax expense - IS
Cr - Deferred tax - SFP

Question 8

Steps for deferred tax (temporary)

Answer 8

1. calculate carrying amount
2. calculate tax base
3. calculate temporary difference
4. apply tax rate
5. corporation tax payable in total
6. post to the accounts

Question 9

records for carrying amount < tax base

Answer 9

DR - Deferred tax - SFP
CR - Tax Expense - IS

Question 10

Deferral method

Answer 10

the tax effects of timing differences are calculated using the tax rates existing when the differences arose. No adjustments are made if the tax rate changes.

Question 11

liability method

Answer 11

defend tax provision is calculated using the rate at which it’s estimated the tax will be paid when the timing differences reverse.