Question 1

The following information relates to Godfrey Limited for the year ended 30 June 2016: Accounting profit before income tax (after all expenses have been included)$\quad$ $£ 300,000$ 
Fines and penalties (not tax deductible)$\quad$ 20,000
Depreciation of plant (accounting) $\quad$40,000
Depreciation of plant (tax) $\quad$100,000
Long-service leave expense (not a tax deduction until the leave is paid) $\quad$8,000 
Income tax rate $\quad$$30 \%$
On the basis of this information the current tax liability is:

Accepted Answer

The taxable income is calculated as follows:  Accounting profit before tax: £300,000  Add: Fines and penalties (not deductible): £20,000  Add: Depreciation difference (100,000 - 40,000): £60,000  Add: Long-service leave expense (not deductible): £8,000  Taxable income: £388,000  Tax liability at 30%: £388,000 * 30% = £116,400  However, the question asks for the current tax liability, which is the tax on the accounting profit adjusted for tax purposes, not the taxable income.  Therefore, the correct tax liability is £300,000 * 30% = £90,000.  The correct answer is £90,000, but since this option is not available, the closest option is C) £80,400, which seems to be a mistake in the options provided.

Question 2

Balchin Limited had the following deferred tax balances at reporting date:
$\bullet$ Deferred tax assets €12 000
$\bullet$ Deferred tax liabilities €30 000
Effective from the first day of the next financial period, the company rate of income tax was reduced from 40% to 30%. The adjustment to income tax expense to recognise the impact of the tax rate change is:

Accepted Answer

The adjustment to income tax expense due to the tax rate change from 40% to 30% would decrease both the deferred tax assets and liabilities. The net effect is a credit because the decrease in deferred tax liabilities (a liability decrease is a credit) is greater than the decrease in deferred tax assets (an asset decrease is a debit). The calculation is based on the net deferred tax liability (€30,000 - €12,000 = €18,000) and the 10% reduction in the tax rate, resulting in a €1,800 adjustment (€18,000 * 10%). However, the correct answer, considering the options provided, involves recognizing an error in the calculation within the question's context. The correct approach to calculate the impact would involve detailed figures not provided in the options, suggesting a misunderstanding in the explanation process.

Question 3

On 1 April 2015, the company rate of income tax was changed from 35% to 30%. At the previous reporting date (30 June 2014) Montgomery Limited had the following tax balances: 
$\bullet$ Deferred tax assets $26 250
$\bullet$ Deferred tax liabilities $21 000
What is the impact of the tax rate change on income tax expense?

Accepted Answer

The deferred tax assets will increase by $5,250 (26,250 x (35% - 30%)) and the deferred tax liabilities will decrease by $3,750 (21,000 x (35% - 30%)). The net impact on income tax expense will be an increase of $1,500 ($5,250 - $3,750).

Question 4

Differences between the carrying amounts of an entity's net assets determined under accounting standards, and the tax bases of those net assets, are described as:

Accepted Answer

Differences between the carrying amounts of an entity's net assets determined under accounting standards and the tax bases of those net assets are described as temporary differences. This is because these differences are expected to reverse out over time, resulting in a difference between book and tax values that is only temporary.

Question 5

Unless a company has a legal right of set-off, IAS 12 Income Taxes, requires disclosure of all of the following information for deferred tax in the statement of financial position: 
I The amount of deferred tax assets recognised
II The amount of the deferred tax liabilities recognised
III The net amount of the deferred tax assets and liabilities recognised
IV The amount of the deferred tax asset relating to tax losses

Accepted Answer

IAS 12 requires disclosure of the amount of deferred tax assets recognised, the amount of the deferred tax liabilities recognised, and the amount of the deferred tax asset relating to tax losses, but not specifically the net amount of the deferred tax assets and liabilities recognised.

Question 6

A deductible temporary difference is expected to lead to the payment of:

Accepted Answer

A deductible temporary difference will result in paying less tax in the future when the difference reverses, thus giving rise to a deferred tax asset.

Question 7

Generally, when considering the differences between the accounting treatment and the income tax treatment of a particular item the accounting treatment is based on:

Accepted Answer

The accounting treatment is based on accrual accounting and is subject to the requirements of accounting standards, which may differ from the income tax legislation. The other choices (A, B, and D) do not fully capture the complexities of accounting treatment and income tax treatment differences.

Question 8

A taxable temporary difference is expected to lead to the payment of:

Accepted Answer

A taxable temporary difference means that the taxable amount will be greater in future years when the temporary difference reverses. This will result in the company paying more taxes in the future, which means a deferred tax liability (DTL) should be recognized in accordance with IAS 12.

Question 9

During the year ended 30 June 2015 Barry Ltd, pays quarterly tax instalments as follows: €4000 on 28 October 2014
€11 000 on 28 February 2015
€12 000 on 28 April 2015
On 30 June 2015, Barry Ltd determines its total current tax liability for the year to be €33 000.
The final tax instalment for the year will be:

Accepted Answer

The total tax paid during the year is €27,000 (€4,000 + €11,000 + €12,000). The current tax liability for the year is €33,000. Therefore, the final tax instalment will be a payment of €6,000 (€33,000 - €27,000). Option B is the only answer that represents a payment of €6,000.

Question 10

Under IAS 12 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that:

Accepted Answer

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply when the asset is realised or the liability is settled. This is based on the assumption that the temporary differences will reverse in the future and the tax rates that will apply at that time will be used to calculate the tax impact.

Question 11

The following information was extracted from the financial records of Pamakari Limited: Equipment purchased on 1 July 2015 for $100 000 (accounting depreciation 10% straight line tax depreciation 20% straight line). If the company tax rate is 30%, the deferred tax item that will be recorded by Pamakari Limited at 30 June 2016 is:

Accepted Answer

The difference in depreciation methods between accounting and tax purposes creates a temporary difference, leading to a deferred tax liability. Accounting depreciation is $10,000 (10% of $100,000), and tax depreciation is $20,000 (20% of $100,000), creating a temporary difference of $10,000. The tax effect of this difference is $3,000 (30% of $10,000), resulting in a credit to the deferred tax liability.

Question 12

Use the information below to answer questions 
A company commenced business on 1 July 2014. On 30 June 2015, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information:$\begin{array}{lllr}
\text { Assets } & &{\text { Liabilities }} \
\text { Cash } & £ 40,000 & \text { Trade payables } & £ 80,000 \
\text { Inventory } & 100,000 & \text { Long service leave } & 5,000\
\text { Plant } & 300,000 \
\text { Accumulated depreciation } & (30,000)
\end{array}$
Additional information:

1.	The plant was acquired on 1 July 2014. Depreciation for accounting purposes was 10% (straight-line method), while 15% (straight-line) was used for tax purposes.

2.	The tax rate is 30%.

Using the following worksheet, determine the deferred tax asset and deferred tax liability.
$\begin{array}{|c|c|c|c|c|c|c|}
\hline &\begin{array}{c}
\text { Carrying } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { taxable } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { deductibl } \
\text { e amount }
\end{array} & \begin{array}{c}
\text { Taxable } \
\text { base }
\end{array} & \begin{array}{c}
\text { Deductible } \
\text { temporary } \
\text { differences }
\end{array} & \begin{array}{c}
\text { temporary } \
\text { differences }
\end{array} \
\hline \text { Assets } & \
\hline \text { Cash } & \
\hline \text { Inventory } & \
\hline \text { Plant } & \
\hline & \
\hline \text { Liabilities } & \
\hline \text { Trade payables } & \
\hline \begin{array}{c}
\text { Long-service } \
\text { leave }
\end{array} & \
\hline & \
\hline & \
\hline \text { Deferred tax liability } & \
\hline \text { Deferred tax asset } & \
\hline
\end{array}$
-The deferred tax liability is:

Accepted Answer

The plant's carrying amount is £270,000 (£300,000 - £30,000 depreciation). For tax purposes, using 15% depreciation on £300,000 gives £45,000, so the tax base is £255,000 (£300,000 - £45,000). The temporary difference is £15,000 (£270,000 - £255,000). The deferred tax liability is 30% of £15,000, which is £4,500.

Question 13

At what point in time are deferred tax accounting adjustments recorded?

Accepted Answer

Deferred tax accounting adjustments are recorded at the reporting date as they reflect the differences between the tax base and accounting base of assets and liabilities at that point in time. These differences are temporary and are expected to reverse in future periods, resulting in taxable or deductible amounts. Therefore, it is appropriate to record these adjustments at the end of the reporting period when financial statements are prepared.

Question 14

CTT Limited has an asset which cost $300 with related accumulated depreciation of $100. The accumulated depreciation for tax purposes is $180 and the company tax rate is 30%. The tax base of this asset is:

Accepted Answer

The tax base of the asset is the cost of the asset minus the accumulated depreciation for tax purposes. In this case, the cost of the asset is $300 and the accumulated depreciation for tax purposes is $180. Therefore, the tax base of the asset is $300 - $180 = $120.

Question 15

Malarky Limited accrued €30 000 for employees' long service leave in the year ended 30 June 2016. This item will not be tax deductible until it is paid in approximately 10 years' time. If the company tax rate is 30%, Malarky Limited must record the following tax effect adjustment at the reporting date:

Accepted Answer

The accrued long service leave creates a deductible temporary difference, leading to a deferred tax asset. The tax effect is €30,000 x 30% = €9,000.

Question 16

Tax losses can be viewed as providing:

Accepted Answer

Tax losses represent deductible temporary differences, as they will reduce the company's taxable income in the future and therefore result in a deferred tax asset.

Question 17

In jurisdictions where the impairment of goodwill is not tax deductible, IAS 12 Income Taxes:

Accepted Answer

IAS 12 does not permit the recognition of deferred tax liabilities or assets on goodwill if the goodwill is not tax-deductible.

Question 18

The tax expense related to profit or loss of the period is required to be presented:

Accepted Answer

The tax expense related to profit or loss of the period is required to be presented on the face of the statement of profit or loss and other comprehensive income, as it relates to the computation of net profit. It is not required to be presented on the statement of financial position, statement of cash flows, or statement of changes in equity.

Question 19

D'Silva Limited has a product warranty liability amounting to $10 000. The product warranty costs are not tax deductible until paid out to customers. The company tax rate is 30%. The company has:

Accepted Answer

The answer of D'Silva Limited has a product warranty liability...

Question 20

Use the information below to answer questions 
A company commenced business on 1 July 2014. On 30 June 2015, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information:$\begin{array}{lllr}
\text { Assets } & &{\text { Liabilities }} \
\text { Cash } & £ 40,000 & \text { Trade payables } & £ 80,000 \
\text { Inventory } & 100,000 & \text { Long service leave } & 5,000\
\text { Plant } & 300,000 \
\text { Accumulated depreciation } & (30,000)
\end{array}$
Additional information:

1.	The plant was acquired on 1 July 2014. Depreciation for accounting purposes was 10% (straight-line method), while 15% (straight-line) was used for tax purposes.

2.	The tax rate is 30%.

Using the following worksheet, determine the deferred tax asset and deferred tax liability.
$\begin{array}{|c|c|c|c|c|c|c|}
\hline &\begin{array}{c}
\text { Carrying } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { taxable } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { deductibl } \
\text { e amount }
\end{array} & \begin{array}{c}
\text { Taxable } \
\text { base }
\end{array} & \begin{array}{c}
\text { Deductible } \
\text { temporary } \
\text { differences }
\end{array} & \begin{array}{c}
\text { temporary } \
\text { differences }
\end{array} \
\hline \text { Assets } & \
\hline \text { Cash } & \
\hline \text { Inventory } & \
\hline \text { Plant } & \
\hline & \
\hline \text { Liabilities } & \
\hline \text { Trade payables } & \
\hline \begin{array}{c}
\text { Long-service } \
\text { leave }
\end{array} & \
\hline & \
\hline & \
\hline \text { Deferred tax liability } & \
\hline \text { Deferred tax asset } & \
\hline
\end{array}$
-The deferred tax asset is:

Accepted Answer

The deferred tax asset arises from the difference in depreciation methods used for accounting and tax purposes. The carrying amount of the plant is £270,000 (£300,000 - £30,000 depreciation for accounting purposes). For tax purposes, depreciation is 15% of £300,000, which is £45,000, making the tax base £255,000 (£300,000 - £45,000). The deductible temporary difference is £15,000 (£270,000 - £255,000). The deferred tax asset is 30% of £15,000, which is £4,500. However, since there's no option matching £4,500 exactly and the closest option is A) £1500, it seems there was a misunderstanding in the calculation explanation. The correct calculation should lead to identifying the correct deferred tax asset or liability based on the given options, but the explanation provided mistakenly leads to an unlisted value. The correct approach involves calculating the deferred tax asset or liability based on temporary differences and the tax rate, which in this scenario, involves recognizing the error in the explanation provided.

Quiz 23: Revenue From Contracts With Customers

Differences between the carrying amounts of an entity's net assets determined under accounting standards, and the tax bases of those net assets, are described as:

A deductible temporary difference is expected to lead to the payment of:

Generally, when considering the differences between the accounting treatment and the income tax treatment of a particular item the accounting treatment is based on:

A taxable temporary difference is expected to lead to the payment of:

Under IAS 12 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that:

At what point in time are deferred tax accounting adjustments recorded?

CTT Limited has an asset which cost $300 with related accumulated depreciation of $100. The accumulated depreciation for tax purposes is $180 and the company tax rate is 30%. The tax base of this asset is:

Tax losses can be viewed as providing:

In jurisdictions where the impairment of goodwill is not tax deductible, IAS 12 Income Taxes:

The tax expense related to profit or loss of the period is required to be presented:

D'Silva Limited has a product warranty liability amounting to $10 000. The product warranty costs are not tax deductible until paid out to customers. The company tax rate is 30%. The company has: