FINANCIAL ACCOUNTING 202 [FAC612S] (SOFP) 60,000 Provisional tax payments (2 provisional payments...
Transcript of FINANCIAL ACCOUNTING 202 [FAC612S] (SOFP) 60,000 Provisional tax payments (2 provisional payments...
Feedback on Tutorial Letter 1- Semester 2: FAC 612 S
Question 1:
Current Tax and Deferred Taxation workings and disclosures
This question was answered well, with very few errors made.
Students need to be clear to distinguish between permanent and temporary differences when
preparing the current tax computation. Not distinguishing between the two does not demonstrate
an understanding with what is permanent and what is temporary in nature- and as such will not be
tolerated in examinations and could lead to penalisation.
Question 2:
Journal entries on taxation and computation of current tax
Well answered. Some students indicated a journal for every expense and income for the year- which
was not required, as only TAXATION journals were required.
Question 3:
This section was extremely well done. Provisions per IAS 37 journal were well answered.
The theory was also well attempted.
NOTE: Plagiarism remains a serious academic crime, and will not be tolerated – be warned.
Question 1 (30 Marks)
a) Calculation of Current income tax and deferred Income Tax
Working 1 2,016 2,015 2,014
Profit before tax -20,000 -10,000 10,000 a
Exempt Income -20,000 -20,000 -20,000 a
Assessed Tax loss brought forward -140,000 -110,000 -100,000 a
Taxable Income/(Tax loss) -180,000 -140,000 -110,000
1/2 each 6 marks
Current Income Tax - -
Calculation of deferred income tax
Working 2
CA TB TD DT
Balance 1 January 2014 - 100,000 100,000 30,000 DTA
Movement 3,000 a
Balance 31 December 2014 - 110,000 110,000 33,000 DTA
Movement 9,000 a
Balance 31 December 2015 - 140,000 140,000 42,000 DTA
Movement 12,000 a
Balance 31 December 2016 - 180,000 180,000 54,000 DTA
2 marks each 6 marks
Income Tax Expense 2,016 2,015 2,014
Current tax - - - a
Deferred Tax
Current Year movment in temp differences -12,000 -9,000 -3,000 a
Current year DTA not recognised 9,000 - a
Prior year DTA written-down/(back) -33,000 33,000 a
Prior year unrecognised DTA now recognised -9,000 - - a
Tax expense per statement of comprehensive income-54,000 33,000 -3,000
5 marks
Tax reconciliation
Applicable tax rate 30% 30% 30%
Tax effects of:
Profit before taxtaion
(2016:20 000*30%; 2015:10 000*30%; 2014: 10 000*30%)-6,000 -3,000 3,000 3
Exempt dividend income -6,000 -6,000 -6,000 3
Current tear deferred tax asset not recognised - 9,000 - 1
Prior year DTA written down -33,000 33,000 - 2
Prior year unrecognised DTA recognised -9,000 - - 1
-54,000 33,000 -3,000
10 marks
Effective tax rate (tax expense/Profit before tax)*100-270% 330% -30%
Deffered Income tax asset
The deferred tax balance comprises tax on following types of temporary differences:
Tax loss 54,000 - 33,000
30 MARKS 3 marks
Question 2
Journals Debit Credit
2014
Current tax payable (SOFP) 60,000 a
Bank (SOFP) 60,000 a
Provisional tax payments (2 provisional payments total)
Income tax expense (p/l) 99,000 a
Current tax payable 99,000 a
Provisional tax payments (2 provisional payments total)
2015
Current tax payable: (SOFP) 70,000 a
Bank (SOFP) - 70,000 a
Income tax expense (SOCI: P/L) 111,000 a
Current tax payable: income tax (SOFP: current liability)111,000 a
Current income tax estimated for 20X2 (see working 1)
Current tax payable: income tax (SOFP: current liability)5,000 a
Income tax expense (SOCI: P/L) 5,000 a
Current income tax over-estimated in 20X1 (see working 2)
2016
Current tax payable: income tax (SOFP: current liability)100,000 a
Bank (SOFP: current asset) 100,000 a
Income tax expense (SOCI: P/L) 153,000 a
Current tax payable: income tax (SOFP: current liability)153,000 a
Current income tax estimated for 20X3 (see working 1)
Income tax expense (SOCI: P/L) 3,500 a
Current tax payable: income tax (SOFP: current liability)3,500 a
Current income tax under-estimated in 20X2 (see working 2)
16 Marks
Calculation of current income tax 2,014 2,015 2,016
Profit before tax 300,000 400,000 450,000 a
Permanent differences
Add: donations 40,000 - -
340,000 400,000 450,000
temporary Differences -10,000 -30,000 60,000
Less; profit on sale of vehicles -30,000
Add: recoupment on sale of vehicle 30,000
Less: Profit on sale of machine -30,000
Add: recoupment on sale of machine 50,000
20,000 10,000 40,000
- -20,000 -10,000
-30,000 -40,000 -20,000
- 30,000 40,000
Add; depreciation - 15,000 15,000
Less: wear and tear - -25,000 -25,000
Taxable profits 330,000 370,000 510,000
(1 marks each) 24 Marks
30% 30% 30%
2,016 2,015 2,014
99,000 111,000 153,000
Current income tax estimated (W1)
Current income tax assessed (Given) 99,000 111,000 153,000
(Over-provision) / Under-provision 94,000 114,500 not yet assessed
5,000 3,500 unknown
Assessme
nt
received
in 2015,
thus
journalise
d in: 2015
Assessmen
t received
in 2016,
thus
journalised
in: 2016
Provisional tax payments (this is the total of the 2 provisional payments - these would
normally each be journalised separately)
add: Income received in advance
c/balance
less: Income received in advance
o/balance
Less: Expenses prepaid: c/balance
Add: expeneses prepaid:
o/balance
W2: Calculation of over/ under
provision of current income tax
Question 3 Debit Credit
01/10/2015
Plant & machinery: cost (A) 1,000,000 a
Bank 1,000,000 a
(Purchase price)
10-12/2015
Plant & machinery: cost (A) 175,480 a
Bank 175,480 a
(Installation costs)
01/01/2016
Plant & machinery: decommissioning: cost (A)74,520 a
Provision for decommissioning liability 74,520 a
(PV of future decommissioning costs)
31/12/2016
Finance costs 7,440 a
Provision for decommissioning liability 7,440 a
(Unwinding of PV of decommissioning liability)
(81 960 – 74 520)
Depreciation: plant & machinery 250,000 a
Plant & machinery: accumulated depreciation 235,096 a
Plant & machinery: accumulated depreciation - decommissioning14,904 a
(1 175 480 / 5); (74 520 / 5)
11 Marks
Please note: the accumulated depreciation of each of these two parts – the physical
plant & machinery
Issue
Definitions
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Discussion
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Note to student:
(14 Marks)
required to settle the obligation (the payment of the decommissioning costs in the
future); and
estimated at C120 000).This provision must be capitalised to the cost of the plant and machinery. This is because
assets are measured at cost, and one of the components of cost is future
decommissioning costs. IAS 16.16(c)
IAS 37 defines a provision as a liability of uncertain timing or amount. IAS 37.10 Thus it is
necessary to firstly determine whether or not there is a liability. The Conceptual
framework defines a liability as:
In determining whether or not a present obligation exists, IAS 37 provides further
guidance in stating that a present obligation may be a legal or a constructive obligation.
A legal obligation is an obligation that derives from:
The issue is to determine whether or not to recognise a provision in respect of the
future decommissioning costs.
The licence granted allows the operation of the plant and machinery but includes a
clause that requires the entity to dismantle the plant and machinery, and restore the
area in the future. There is therefore a legal obligation for the costs associated with the
future dismantling and restoration.A past event that leads to a present obligation is called an obligating event. The
obligating event is the installation of the plant and machinery in terms of this licence and
thus there is a legal obligation present at year-end.
Decommissioning and dismantling are two terms that are frequently used in the
accounting world to refer essentially to the same thing. Strictly speaking,
‘decommissioning’ refers to taking an asset (e.g. machine or plant) out of operation
whereas ‘dismantling’ refers to the ‘taking apart’ of an asset
A provision for future decommissioning costs must be recognised since there is:
terms of the licence; and