Chapter 23 - Tax in Company Financial Statements

Question 1

Corporation Tax

Answer 1

CT charge is an estimate which is accrued for at the end of the AP and is paid to HMRC 9 months and 1 days after
1) Put opening CT provision into CT creditor ledger
2) Dr CT creditor with payment of last year’s tax
Cr Bank
3) Then put through any under/over provision adjustments
DR CT charge (under provision)
CR CT creditor
or
DR CT creditor (over provision)
CR CT charge

Question 2

Step 1

Answer 2

Put opening CT provision into CT creditor ledger

Question 3

Step 2

Answer 3

Dr CT creditor with payment of last year’s tax

Cr Bank

Question 4

Step 3

Answer 4

Then put through any under/over provision adjustments:
DR CT charge (under provision)
CR CT creditor

OR

DR CT creditor (over provision)
CR CT charge

Question 5

Step 4

Answer 5

Post this year’s estimate of CT tax on profits for the period:
DR CT charge
CR CT creditor

Question 6

Step 5

Answer 6

Balance off the CT charge ledger to thr P&L a/c. Balance off the CT creditor ledger to give a new balance b/d

Question 7

Note

Answer 7

CT creditor can be called CT provision, CT liability.

CT charge can be called CT expense

Question 8

Deferred Tax

Answer 8

Deferred tax is an accounting adjustment only. DT is provided on timing differences (ie items that appear int he P&L a/c in one period and in the tax comp in another). DT is used to try and match income and expenditure with a related amount of tax in the P&L a/c for the year

Question 9

DT: Exam Technique

Answer 9

Step 1: identify expenses that have been allowed for CT purposes (e.g cap allowances)

Step 2: deduct the equivalent expense that has been deducted in the P&L acc (e.g depr). This gives you the timing difference that will be positive or negative

Step 3: Apply the relevant CT rate to the timing difference from Step 2, this movement is the DT provision. A positive is an increase and a negative is a decrease to the provision

Question 10

DT: Double Entry - Increase

Answer 10

DR DT charge (P&L expense increase)

CR DT provision (B/S liability increase)

Question 11

DT: Double Entry - Decrease

Answer 11

DR DT provision (B/S liability decrease)

CR DT charge (P&L expense decrease)

Question 12

Alternative DT Method

Answer 12

Not technically correct but easier to apply and will work providing there’s no permanent differences between the CT tax calc and the profit before tax such as disallowed expenses for tax purposes

Question 13

Method

Answer 13

Step 1: Calculated the CT tax charge in the AP as normal
Step 2: Using the same tax rat, calc the expected tax charge on the profit before tax figure in the accounts
Step 3: The movement in the deferred tax provision is the balancing figure between the two
Positive balancing figure increases the provision, a negative reduces it

Question 14

DT Reconcilliations

Answer 14

A DT rec is a note to the P&l a/c in a set of co accounts that explains why the CT charge in the PL doesn’t equal the expected tax charge.

Question 15

Expected Tax Charge

Answer 15

Profit before tax in the P&L at the rate of CT

Question 16

DT Rec: Exam Technique - Step 1

Answer 16

Start with PBT and do the normal adjustments to get trade profit. Calculate the tax due for the AP as normal

Question 17

DT Rec: Exam Technique - Step 2

Answer 17

Set up the rec working, start with the CT charge at the top.

• Any adjustments which were added back need to be times by the CT rate and deducted from the charge rec
• Any adjustments which were deducted must be times by the tax rate and added to the charge rec

Question 18

Note

Answer 18

Another way to show step 2 is to put the adjustments under sub headings to show they are either timing or perma differences

Question 19

DT Rec: Exam Technique - Step 3

Answer 19

Add up the rec to give the expected tax charge.

It can also be calculated by taking PBT from the PL and multiplying it by the CT rate