Tax Flashcards
How do you calculate current tax charge?
The current tax charge in the Statement of Profit and Loss is made up as follows:
Current Tax Expense x
Under/Over provision from the previous year x/(x)
Deferred tax provision for the year x/(x)
Under-provision = amount settled > amount previously recognised
Overprovision = amount settled < amount previously recognised
ABC has estimated its income tax liability for the year ended 31 Dec 20X2 as $360, 000. In the previous year the income tax liability had been estimated as $300,000.
Calculate the tax charge if the final settlement with the tax authorities for 20X1 had been
$330,000
Underprovision
Charge 360000
Under 330000 – 300000 30000
CHARGE 390000
ABC has estimated its income tax liability for the year ended 31 Dec 20X2 as $360, 000. In the previous year the income tax liability had been estimated as $300,000.
Calculate the tax charge if the final settlement with the tax authorities for 20X1 had been
$280,000
Overprovision
Charge 360000
Overprovision 280000-300000 (20000)
CHARGE 340000
What is defered tax?
Aims to eliminate mismatch between accounting profit and tax profit.
Differences between accounting profit and tax profit are made up of
Permanent differences – items allowed in the accounts but not for tax eg.penalties and fines, meals and entertainment, life insurance proceeds, interest on municipal bonds,
Temporary differences – items allowed for tax but in a later period
Main temporary differences are:
Certain items of income and expenditure that are recorded on a cash basis for tax but accruals basis for accounts
Depreciation and capital allowances
Only temporary differences give rise to deferred.
What is the tax computation?
Net Profit per accounts x
Add: Expenditure not allowed for
taxation purposes
Depreciation X
Political donations X
Entertaining X X
Less: Allowances for tax purposes
Capital allowances (x)
Income in the accounts not
taxable as trading income (x) (X)
Tax adjusted trading profit XX
What is deferred tax on losses?
a deferred tax asset is recognised on any unutilised losses.
losses will be offset against future trading profits thereby reducing the tax payable
Asset recognised only to the extend of profits in future against which losses can be offset
Smyth Limited has accumulated losses of $180,000 brought forward but it is anticipating profits of $45,000 for the next three years but it is unsure beyond this as the business operates in a very dynamic and changing market with lots of competitors
The current rate of corporate tax is 30%
Prepare the journal entry to record the deferred tax arising on the losses:
Deferred tax asset is (3 x 45,000) = 135,000 max loss recoverable. Tax 30% x 135k = 40.5k
DR DT Asset 40.5
CR Statement of Profit or Loss 40.5
How do revaluations effect tax?
A revaluation of a NCA
Increases the carrying value in the accounts but does not affect the tax base
cumulative temporary difference will increase, increasing the deferred tax liability
The revaluation surplus is shown in other comprehensive income
The movement in the deferred tax liability relating to the revaluation should be shown in other comprehensive income
On 1 Jan 20x7 Paris Limited revalued some land for the first time.
It was originally purchased 6 years ago for $156,000 and was revalued on 1 Jan 20x7 to $192,000
The difference between the carrying value of the assets in the SOFP (inc. Land) and the tax base at 31 Dec 20x7 was $71,040
On the 1 Jan 20x7 the deferred tax liability was $6,240 and the tax rate is 20%
Show the Journal entries
DT liability 71040 x 20% = 14,208
Relating to the revaluation (192,000 – 156,000) x 20% = 7,200
Increase in liability (14,208 – 6240) = 7,968 of which 7,200 is OCI and 768 is P&L
DR Income tax expense P&L 768, DR Income tax OCI 7200 and CR DT SOFP 7968
How do share options effect tax?
In the financial statements the expense is shown over the vesting period
For tax the deduction is usually given at the end of the period when the options are exercised
This results in a timing difference, generating a deferred tax asset as there will be a future benefit
Use intrinsic value
CN granted each of its 400 staff 100 options 1.1.X5. To exercise the options the staff must stay with CN for 3 years and exercise on 31.12.X7.
Fair value of the option at grant date was $24
Exercised price is $19.2
In year to 31.12.X5 10 staff leave and it is expected a further 20 will leave over the following 2 years.
At 31.12.X5 share price is $36 and therefore the intrinsic value of the option is (36 – 19.2) = $16.8 and the corporate tax rate is 20%
Show the impact on the financial statements
Expenses (400 – 10 -20) = 370 x 100 x $24 x 1/3 = $296,000 DR expenses CR Equity
DT (400 – 10 – 20) x 100 x 16.8 (intrinsic value) x 1/3 = 207,200 x 20% = $41,440 DR DT asset CR SPL – tax expense
