Deck 12: Income Taxes

Question 1

The following information was extracted from the financial records of Pineapple Limited: Equipment purchased on 1 July 2021 for $200 000 (accounting depreciation 10% straight line; tax depreciation 15% straight line). If the company tax rate is 30%, the deferred tax item that will be recorded by Pineapple Limited at 30 June 2022 is:

A) CR Deferred tax asset $3000.
B) DR Deferred tax asset $3000.
C) CR Deferred tax liability $3000.
D) DR Deferred tax liability $3000.

Answer 1

C

Question 2

The following information relates to Jefferson Limited for the year ended 30 June 2022. Accounting profit before income tax (after all expenses have been included) $200 000
Entertainment expenses (not tax deductible) 10 000
Depreciation of machinery (accounting) 20 000
Depreciation of machinery (tax) 50 000
Annual leave expense (not a tax deduction until the leave is paid) 4 000
Income tax rate 30%
On the basis of this information the current tax liability is:

A) $55 200.
B) $64 800.
C) $45 000.
D) $51 000.

Answer 2

$55 200.

Question 3

Maleny Limited accrued $40 000 for employees' long service leave in the year ended 30 June 2021. This item will not be tax deductible until it is paid in approximately 5 years' time. Assuming the company tax rate is 30%, Maleny Limited must record the following tax effect as a balance date adjustment:

A) DR Deferred tax asset $12 000.
B) DR Deferred tax liability $12 000.
C) CR Deferred tax asset $12 000.
D) CR Deferred tax liability $12 000.

Answer 3

A

Question 4

A company commenced business on 1 July 2022. On 30 June 2023, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: Assets Liabilities
Cash $20 000 Accounts payable $50 000
Inventories 60 000 Provision for annual leave 8 000
Plant 200 000
Accumulated depreciation (20 000)
Additional information:
The plant was acquired on 1 July 2022. Depreciation for accounting purposes was 10% (straight-line method), while 20% (straight-line) was used for tax purposes.
The tax rate is 30%.
Using the following worksheet, determine the deferred tax asset and deferred tax liability.
$\begin{array}{|l|c|c|c|c|c|c|}\hline& \begin{array}{c}\text { Carrying } \\\text { amount }\end{array} & \begin{array}{c}\text { Future } \\\text { taxable } \\\text { amount }\end{array} & \begin{array}{c}\text { Future } \\\text { deductible } \\\text { amount }\end{array} & \text { Tax base } & \begin{array}{c}\text { Taxable } \\\text { temporary } \\\text { differences }\end{array} & \begin{array}{c}\text { Deductible } \\\text { temporary } \\\text { differences }\end{array} \\\hline \text { Assets } & \\\hline \text { Cash } & \\\hline \text { Inventories } & \\\hline \text { Plant } & \\\hline\\\hline \text { Liabilities } & \\\hline \text { Accounts payable } & \\\hline \text { Prov'n annual leave } & \\\hline\\\hline\\\hline\text { Deferred tax liability }\\\hline\text { Deferred tax asset }\\\hline\end{array}$ The deferred tax liability is:

A) $2 400.
B) $6 000.
C) $8 000.
D) $20 000.

Question 5

Colonial Limited has a machine which cost $300 000 and has been depreciated by $100 000 to date. The accumulated depreciation for tax purposes is $180 000 and the company tax rate is 30%. The tax base of this asset is:

A) $54 000
B) $60 000
C) $120 000
D) $200 000

Question 6

If a company has not yet paid their existing tax payable they will recognise a in the statement of financial position.

A) current tax asset.
B) non-current asset.
C) current tax liability.
D) non-current liability.

Question 7

Mangrove Limited has a product warranty liability valued at $12 000. The product warranty costs are not tax deductible until paid out to customers. The company tax rate is 30%. The company has:

A) a deductible temporary difference of $12 000.
B) a taxable temporary difference of $12 000.
C) a deferred tax asset of $12 000.
D) a future deductible amount of $0.

Question 8

At which time are deferred tax accounting adjustments to be recorded?

A) At balance date.
B) At the end of each month.
C) When each transaction arises.
D) When the cash flows from each transaction occur.

Question 9

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 known as:

A) tax losses.
B) temporary differences.
C) permanent differences.
D) the current income tax liability.

Question 10

A company commenced business on 1 July 2022. On 30 June 2023, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: Assets Liabilities
Cash $20 000 Accounts payable $50 000
Inventories 60 000 Provision for annual leave 8 000
Plant 200 000
Accumulated depreciation (20 000)
Additional information:
The plant was acquired on 1 July 2022. Depreciation for accounting purposes was 10% (straight-line method), while 20% (straight-line) was used for tax purposes.
The tax rate is 30%.
Using the following worksheet, determine the deferred tax asset and deferred tax liability.
$$\begin{array} { | l | l | l | l | l | l | l | } \hline & \begin{array} { c } \text { Caryyng } \\\text { amount }\end{array} & \begin{array} { c } \text { Future } \\\text { taxable } \\\text { amount }\end{array} & \begin{array} { c } \text { Future } \\\text { deductible } \\\text { amount }\end{array} & \text { Tax base } & \begin{array} { c } \text { Taxable } \\\text { temparary } \\\text { differences }\end{array} & \begin{array} { c } \text { Deductible } \\\text { temparary } \\\text { differences }\end{array} \\\hline \text { Assets } & & & & & & \\\hline \text { Cash } & & & & & & \\\hline \text { Irveritories } & & & & & & \\\hline \text { Plart } & & & & & & \\\hline & & & & & & \\\hline \text { Liabilities } & & & & & & \\\hline \text { Accourits payable } & & & & & & \\\hline \text { Provrn arrual leave } & & & & & & \\\hline & & & & & & \\\hline & & & & & & \\\hline \text { Deferred tax liability } & & & & & & \\\hline \text { Deferred tax asset } & & & & & & \\\hline\end{array}$$ The deferred tax asset is:

A) $2 400.
B) $6 000.
C) $8 000.
D) $20 000.

Question 11

In general, the differences between the accounting treatment and the income tax treatment of a particular item if that the accounting treatment is based on:

A) the income tax legislation.
B) cash flows.
C) cash flows adjusted for depreciation charges.
D) accrual accounting and is subject to the requirements of accounting standards.

Question 12

Current tax consequences of business operations are recognised as:

A) a current liability for income tax payable.
B) a non-current liability for taxes payable.
C) a contingent liability for taxes payable.
D) a deferred liability for income tax payable.

Question 13

A deductible temporary difference leads to the payment of:

A) less tax in the future and gives rise to a deferred tax asset.
B) more tax in the future and gives rise to a deferred tax asset.
C) more tax in the future and gives rise to a deferred tax liability.
D) less tax in the future and gives rise to a deferred tax liability.

Question 14

AASB 112 Incomes Taxes requires deferred tax assets and liabilities to be measured at the tax rates that:

A) prevail at the reporting date.
B) applied at the end of the reporting period.
C) applied at the beginning of the reporting period.
D) are expected to apply when the asset is realised or the liability is settled.

Question 15

Amigos Limited has an asset with a carrying value of $60 000. The tax base of this asset is $40 000. The tax rate is 30%. The deferred tax item to be recognised by Amigos Limited is:

A) Deferred tax liability of $20 000.
B) Deferred tax asset of $20 000.
C) Deferred tax liability of $6000.
D) Deferred tax asset of $6000.

Question 16

Omega Limited has an accounting profit before tax of $400 000. All of the following items have been included in the accounting profit: depreciation of plant $70 000 (tax deductible depreciation is $50 000); entertainment expenses $10 000 (non-deductible for tax purposes); Long service leave expense provided $12 000 (no employee took long service leave during the year). The tax rate is 30%. The amount of current tax liability is:

A) $147 600
B) $132 600
C) $107 400
D) $120 000

Question 17

On 1 November 2021, the company rate of income tax was changed from 35% to 30%. At the previous reporting date (30 June 2021) Montgomery Limited had the following tax balances: Deferred tax assets $33 500
Deferred tax liabilities $18 000
What is the impact of the tax rate change on income tax expense?

A) Increase $2 583.
B) Decrease $2 583.
C) Increase $2 214.
D) Decrease $2 214.

Question 18

A taxable temporary difference leads to the payment of:

A) more tax in the future and gives rise to a deferred tax asset.
B) less tax in the future and gives rise to a deferred tax asset.
C) less tax in the future and gives rise to a deferred tax liability.
D) more tax in the future and gives rise to a deferred tax liability.

Question 19

The assumption made for the tax effect method of accounting for a company's income tax is:

A) income tax expense is equal to income tax payable.
B) income tax expense is not equal to current tax liability.
C) an accounting balance sheet and a tax balance sheet are the same.
D) a tax balance sheet is prepared according to accounting standards.

Question 20

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

A) allows the recognition of a deferred tax item in relation to goodwill.
B) does not permit the application of deferred tax accounting to goodwill.
C) requires that any deferred tax items in relation to goodwill be recognised directly in equity.
D) requires that any deferred tax items for goodwill be deducted from the carrying amount of goodwill.

Question 21

Jenson Limited had the following deferred tax balances at reporting date: Deferred tax assets $32 000
Deferred tax liabilities $55 000
Effective from the first day of the next financial period, the company rate of income tax was reduced from 40% to 35%. The adjustment to income tax expense to recognise the impact of the tax rate change is:

A) DR $3 286.
B) CR $3 286.
C) DR $2 875.
D) CR $2 875.

Question 22

Which of the following disclosures are 'optional' under AASB 112?

A) The major components of income tax expense.
B) A numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis of calculating the applicable tax rate.
C) The aggregate current tax or deferred tax that arises relating to items that are charged directly to equity.
D) The amount of deductible temporary differences and unused tax losses, for which no deferred tax asset is recognised in the statement of financial position.