Week 3 - Interest and Tax Flashcards
When do we recognise interest expense?
During the period that the entity has the loan
What is the equation for interest expense?
Interest expense = interest rate x outstanding loan balance
What is our first assumption in this module?
We assume loan balance is unchanged throughout the year - loans usually payed in instalments so would have to recalculate interest each time
What is our second assumption in this module?
Assume interest is at a fixed rate
What is the most common variable interest rate?
Bank of England base rate + a percentage e.g 1%
On what basis is interest paid?
Periodic - monthly, quarterly, semi-annually or even annually
What is the double-entry book-keeping for interest payments?
Debit interest expense
Credit cash
What is an interest payable used for?
Interest owed to the bank that will have to be paid in the future - what is owed compared to what has been paid
How will an interest payable be recorded and where?
As a current liability in the statement of financial position
What is the tax rate?
Currently charged at a flat rate of 19%
How do we calculate corporation tax?
Calculated by applying the tax rate to the PCTCT
What do we do after discovering the PCTCT?
Multiply the PCTCT by the tax rate (19%)
Once calculated, when is the corporation tax paid?
In the next financial year - for small and medium companies, 9 months after the year end
Where is our tax expense recorded?
In the statement of profit or loss
What is the double-entry book-keeping for the corporation tax accrual?
Debit tax expense, credit tax payable
How will a tax payable be recorded and where?
As a current liability in the statement of financial position
What do we need to do if companies receive a corporation tax refund?
Reverse the accounting entry:
Debit tax receivable, credit tax income
Why may a company be due a corporation tax refund?
- if company makes a loss, as they can claim a refund for tax paid in previous years
- if they can claim a lot of tax relief
