Lecture 6 - Income Taxes

Question 1

corporation tax?

Answer 1

companies are liable to pay tax on their profits

Question 2

corporation tax rate?

Answer 2

25% for the financial year beginning 1st April 2023

previously was 19% in the financial year beginning 1st April 2022

Question 3

who are taxes filed to?

Answer 3

HMRC

her majesty’s revenue and customs (HMRC)

Question 4

objective of IAS12?

Answer 4

prescribe accounting treatment for income taxes

Question 5

all listed companies must prepare FS in accordance with…

Answer 5

IFRS

Question 6

accounting profit?

Answer 6

profit/loss for a period before deducting tax expense

Question 7

tax authorities calculate tax based on…

Answer 7

taxable profit

Question 8

taxable profit?

Answer 8

profit/loss for a period determined in accordance with rules established by taxation authorities

Question 9

starting point for calculation of taxable profit?

Answer 9

accounting profit on the I/S

Question 10

2 types of differences between taxable and accounting profit/loss

Answer 10

temporary differences
permanent differences

Question 11

taxable profit/loss = accounting profit/loss?

Answer 11

no

Question 12

temporary differences?

Answer 12

• income/expenses recognised in different time periods
• accrual vs cash
• capital allowances
• depreciation

‘differences between CA of an asset/liability in the SOFP and its tax base’

Question 13

permanent differences?

Answer 13

• exempt income e.g., dividend income
• expenses deducted for accounting, but never allowed for tax purposes

‘differences between taxable/accounting profit that originate in one period and don’t reverse in subsequent periods’

Question 14

how is taxable profit calculated?

Answer 14

• start with accounting profit
• deduct/add back temporary / permanent difference items
• relevant corporation tax is applied to taxable profits
• tax rate is used

Question 15

journal entry if tax is payable vs if tax is recoverable?

Answer 15

payable: DR tax exp, CR current tax liability

recoverable: DR current tax, CR tax exp

Question 16

calculation of taxable profit?

Answer 16

accounting profit
+/- permanent differences
+/- temporary differences
= taxable profit/loss

Question 17

current tax?

Answer 17

the amount of income tax payable in respect of the taxable profit for a period

Question 18

when do small companies pay corporation tax?

Answer 18

9 months and 1 day after the end of the accounting period

Question 19

how do large companies pay taxes?

Answer 19

in instalments

instalment payments are based on the company’s estimate of its corporation tax liability for that AP

instalment payments are due on the 14th day of the 7th, 10th, 13th and 16th months following the START of the accounting period

Question 20

how is under/over provision of tax accounted for?

Answer 20

as a change in accounting estimate

handled prospectively

Question 21

how do you calculate under/over provision?

Answer 21

amount assessed by HMRC less amount provided = under/over provision

e.g., DR tax exp, CR tax authority (under provision)

e.g., DR tax authority, CR tax expense (over provision)

Question 22

components of tax expense include…

Answer 22

• current tax expense
• under/over provision of previous periods
• deferred tax
• changes in tax rate

Question 23

deferred tax?

Answer 23

amount of income tax payable in future periods in respect of taxable temporary differences

tax that is payable in the future

Question 24

deferred tax liability?
deferred tax asset?

Answer 24

DTL = amount of income tax payable in the future

DTA = amount of income tax recoverable in the future

Question 25

treatment of irredeemable preference shares?

Answer 25

irredeemable preference shares remain in existence indefinitely

classified as equity on the SOFP

Question 26

treatment of redeemable preference shares?

Answer 26

classified as a liability on the SOFP

dividend payments on redeemable preference shares are treated as an interest expense, not a distribution of profits

Question 27

bonus issue?

Answer 27

the allocation of additional shares to stockholders

increases the company’s share capital

Question 28

double entry for a share bonus issue?

Answer 28

dr share premium (to reduce it)
cr share capital (to increase it)