Question 1

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, which means that revenue and expenses are recognized when they are earned or incurred, regardless of cash flows. The accounting treatment is subject to the requirements of accounting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Income tax treatment, on the other hand, is based on the income tax legislation and may differ from the accounting treatment due to different rules, regulations and allowable deductions, among other factors. Therefore, C is the correct answer.

Question 2

In jurisdictions where the impairment of goodwill is not tax deductible, AASB 112 Income Taxes:

Accepted Answer

A

Question 3

To the extent that tax payable exists and has NOT yet been paid a company will recognise:

Accepted Answer

If tax payable exists and has not yet been paid, it represents a current tax liability.

Question 4

Use the information below to answer questions 
A company commenced business on 1 July 2012. On 30 June 2013, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information:
$\begin{array}{lrlr}\text { Assets }&&\text { Liabilities } \
\text { Cash } & \$ 40,000 & \text { Accounts payable } & \$ 80,000 \
\text { Inventory } & 100,000 & \text { Long service leave } & 5,000 \
\text { Plant } & 300,000 & & \
\text { Accumulated depreciation }&(30,000) 
\end{array}$
Additional information:
1.	The plant was acquired on 1 July 2012. 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.
 $\begin{array}{|c|c|c|l|c|c|c|}
\hline&\begin{array}{c}
\text { Carrying } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { taxable } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { deductible } \
\text { amount }
\end{array} & \text { Tax base } & \begin{array}{c}
\text { Taxable } \
\text { temporary } \
\text { differences }
\end{array} & \begin{array}{l}
\text { Deductible } \
\text { temporary } \
\text { differences }
\end{array} \\hline \text { Assets } & \
\hline \text { Cash } & \
\hline \text { Inventory } & \
\hline \text { Plant } & \
\hline\\hline \text { Liabilities } & \
\hline \text { Accounts payable } & \
\hline \text { Long-service leave } & \
\hline & \\hline & \
\hline\text { Deferred tax liability }\
\hline\text { Deferred tax asset }\
\hline
\end{array}$
-The deferred tax liability is:

Accepted Answer

The answer of Use the information below to answer questions...

Question 5

Current tax consequences of business operations give rise to:

Accepted Answer

Current tax consequences of business operations give rise to a current liability for income tax payable, as the taxes owed must be paid in the current period. Deferred liability for income tax payable pertains to situations where tax will be paid in future due to temporary differences between accounting and tax rules. Non-current liability for taxes payable refers to taxes owed beyond one year from the balance sheet date, and contingent liability for taxes payable represents uncertain tax situations that may or may not result in a liability.

Question 6

Balchin Limited had the following deferred tax balances at reporting date:
Deferred tax assets $12 000
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 7

The tax effect method of accounting for a company's income tax is based on an assumption that:

Accepted Answer

The tax effect method assumes that income tax expense is not equal to current tax liability, as it takes into account deferred taxes which reflect the timing differences between taxable income and accounting income. This method recognizes that taxes payable in the future may be impacted by certain events that have already occurred in the current period. Therefore, the method calculates the tax impact of events on the financial statements, rather than simply recording the amount of taxes owed in the current period.

Question 8

The following information was extracted from the financial records of Pamakari Limited: Equipment purchased on 1 July 2014 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 2015 is:

Accepted Answer

The answer of The following information was extracted from the...

Question 9

Under AASB 112 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, as stated in AASB 112.

Question 10

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 11

Malarky Limited accrued $30 000 for employees' long service leave in the year ended 30 June 2013. 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 as a balance date adjustment:

Accepted Answer

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

Question 12

Which of the following disclosures are optional under AASB 112?

Accepted Answer

The answer of Which of the following disclosures are optional...

Question 13

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

Accepted Answer

Differences between carrying amounts under accounting standards and tax bases are described as temporary differences. These differences will eventually reverse and result in taxable or deductible amounts in future years. Permanent differences, on the other hand, are differences between the carrying amounts and tax bases that will never reverse and therefore do not give rise to taxable or deductible amounts in the future. Tax losses are losses that can be carried forward to offset future taxable income. The current income tax liability is the amount of tax owed to the government for the current year based on the taxable income of the entity.

Question 14

CTT Limited has an asset which cost $300 and against which depreciation of $100 has accumulated. 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 answer of CTT Limited has an asset which cost...

Question 15

Use the information below to answer questions 
A company commenced business on 1 July 2012. On 30 June 2013, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information:
$\begin{array}{lrlr}\text { Assets }&&\text { Liabilities } \
\text { Cash } & \$ 40,000 & \text { Accounts payable } & \$ 80,000 \
\text { Inventory } & 100,000 & \text { Long service leave } & 5,000 \
\text { Plant } & 300,000 & & \
\text { Accumulated depreciation }&(30,000) 
\end{array}$
Additional information:
1.	The plant was acquired on 1 July 2012. 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.
 $\begin{array}{|c|c|c|l|c|c|c|}
\hline&\begin{array}{c}
\text { Carrying } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { taxable } \
\text { amount }
\end{array} & \begin{array}{c}
\text { Future } \
\text { deductible } \
\text { amount }
\end{array} & \text { Tax base } & \begin{array}{c}
\text { Taxable } \
\text { temporary } \
\text { differences }
\end{array} & \begin{array}{l}
\text { Deductible } \
\text { temporary } \
\text { differences }
\end{array} \\hline \text { Assets } & \
\hline \text { Cash } & \
\hline \text { Inventory } & \
\hline \text { Plant } & \
\hline\\hline \text { Liabilities } & \
\hline \text { Accounts payable } & \
\hline \text { Long-service leave } & \
\hline & \\hline & \
\hline\text { Deferred tax liability }\
\hline\text { Deferred tax asset }\
\hline
\end{array}$
-The deferred tax asset is:

Accepted Answer

The deferred tax asset is calculated as the difference between the tax base and the carrying amount of the asset or liability multiplied by the applicable tax rate. In this case, the deferred tax asset is $1,500 (($45,000 - $40,000) x 0.15)).

Question 16

The following information relates to Godfrey Limited for the year ended 30 June 2014.
$\begin{array} { l r } 
\text { Accounting profit before income tax (after all expenses have been included) } & \$ 300000 \
\text { Fines and penalties (not tax deductible) } & 20000 \
\text { Depreciation of plant (accounting) } & 40000 \
\text { Depreciation of plant (tax) } & 100000 \
\text { Long-service leave expense (not a tax deduction until the leave is paid) } & 8000 \
\text { Income tax rate } & 30 \%
\end{array}$
On the basis of this information the current tax liability is:

Accepted Answer

The answer of The following information relates to Godfrey Limited...

Question 17

On 1 April 2013, the company rate of income tax was changed from 35% to 30%. At the previous reporting date (30 June 2012) Montgomery Limited had the following tax balances:
Deferred tax assets $26 250
Deferred tax liabilities $21 000
What is the impact of the tax rate change on income tax expense?

Accepted Answer

The deferred tax asset will increase by $5,250 (26,250 x (35% - 30%)). The deferred tax liability will decrease by $3,750 (21,000 x (35% - 30%)). The net effect is an increase in income tax expense of $1,500.

Question 18

Deferred tax accounting adjustments are recorded at what point in time?

Accepted Answer

Deferred tax accounting adjustments are recorded at balance date, which is the end of the reporting period. This is because deferred tax relates to timing differences between accounting and tax treatment which are computed at the end of each reporting period.

Question 19

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

Accepted Answer

The answer of A deductible temporary difference is expected to...

Question 20

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

Accepted Answer

A taxable temporary difference means that the amount of tax payable in the future will be higher than what is currently recognized in the financial statements. This results in a deferred tax liability and not a deferred tax asset.

Quiz 7: Income Taxes