F2B - Chapter 9: Income taxes

Question 1

What is deferred tax?

Answer 1

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

Question 2

What is the basis of deferred tax and what does it aim to do?

Answer 2

Basis of allocating tax charges to a particular accounting period
It is an application of the accruals concept and aims to eliminate a mismatch between accounting profit and taxable profit

Question 3

What can cause the difference between accounting profit and taxable profit?

Answer 3

Permanent differences (expenses not allowed for tax purposes)
Temporary differences (expenses allowed for tax purposes but in a later accounting period)

Question 4

What is accounting profit?

Answer 4

The profit before tax figure in the SPL

Question 5

What is the taxable profit?

Answer 5

The figure on which the tax authorities base their tax calculations

Question 6

What are temporary differences?

Answer 6

Differences between the carrying amount of an asset or liabilities in the SFP and its tax base

Question 7

What is the three step approach to determine the accounting entries required for deferred tax?

Answer 7

1. Establish the temporary difference at the year-end
2. Calculate the year end deferred tax balance
3. Record the journal entry showing the increase/decrease in the deferred tax balance during the year