Chapter 13 - Taxation

Question 1

The tax expense in the financial statements is made up of what 2 elements?

Answer 1

• current tax
• deferred tax

Question 2

What is the current tax element?

Answer 2

tax payable to authorities in relation to current year activities, together with any under- or over provision from the previous year

Question 3

What is the deferred tax element?

Answer 3

an application of the accruals concept

Question 4

What is the current year estimate?

Answer 4

this is the estimate of the tax due based on this year’s profits. The final tax due will be agreed month later with the tax authorities, so this represents the best estimate at the year end

Question 5

What is the (over)/under provision?

Answer 5

this is the difference between last year’s estimate and the amount of tax actually paid.

Question 6

If last years tax estimate was higher than the amount actually paid what does this cause?

Answer 6

an over-provision so will reduce the tax charged in the current year.

Question 7

If last years tax estimate was lower than the amount actually paid what does this cause?

Answer 7

an under-provision and it will increase the tax charge in the current period

Question 8

What does deferred tax aim to do?

Answer 8

aims to match the tax effects of transactions with the financial reporting treatment of transactions in an accounting period.

Question 9

If deferred tax has increased what will this do to the tax charge?

Answer 9

increase the tax charge

Question 10

If deferred tax has decreased what will this do to the tax charge?

Answer 10

decrease the tax charge

Question 11

What is the tax expense in the SPL?

Answer 11

it is the current tax plus an increase in deferred tax or less the decrease in deferred tax

Question 12

What is the initial double entry to record current tax?

Answer 12

Dr Tax expense (SPL)
Cr Tax Payable (SFP)

Question 13

what are the 2 things we must be thinking about with deferred tax?

Answer 13

is there a difference temporary?

Question 14

What accounting treatment do we use if there is a difference temporary?

Answer 14

e.g., accelerated tax allowances, deferred tax to be recognised

Question 15

What accounting treatment do we use if there is no difference temporary?

Answer 15

e.g., disallowed expenses, no deferred tax impact

Question 16

how is deferred tax calculated?

Answer 16

by comparing the carrying amount of an asset or liability to its tax base

Question 17

what is the tax base?

Answer 17

the tax base of an asset or liability is its value for tax purposes

Question 18

When would we get a deferred tax liability?

Answer 18

when carrying amount > tax base (a taxable difference)

Question 19

When would we get a deferred tax asset?

Answer 19

Carrying amount < tax base (a deductible difference)

Question 20

What is the double entry for a deferred tax liability?

Answer 20

Dr tax expense
Cr Deferred tax liability

Question 21

What is the double entry for a deferred tax asset?

Answer 21

Dr Deferred tax asset
Cr Tax expense

Question 22

What is the first step in recognising deferred tax?

Answer 22

Step 1: Calculate the temporary difference. CA - tax base

Question 23

What is the second step in recognising deferred tax?

Answer 23

Calculate the deferred tax liability or asset at the end of the year. temporary difference x tax rate

Question 24

What is the third step in recognising deferred tax?

Answer 24

compare the deferred tax liability or asset calculated to the deferred tax liability or asset calculated for the prior year. The movement requires adjustment.

Question 25

What is the double entry for an increase in deferred tax?

Answer 25

Dr tax expense SPL
Cr deferred tax EFP

Question 26

What is the double entry for a decrease in deferred tax?

Answer 26

Dr Deferred tax SFP
Cr Tax Expense SPL

Question 27

What is the double entry for a increase in liability?

Answer 27

Dr Tax expense (SPL)
Cr Deferred tax (SFP)

Question 28

What is the double entry for a decrease in liability?

Answer 28

Dr Deferred tax (SFP)
Cr Tax expense (SPL)

Question 29

What is the double entry for a increase in asset?

Answer 29

Dr Deferred tax (SFP)
Cr Tax expense (SPL)

Question 30

What is the double entry for a decrease in asset?

Answer 30

Dr tax expense (SPL)
Cr Deferred tax (SFP)

Question 31

Where does deferred tax arising on revaluation get recorded?

Answer 31

in other comprehensive income