Deck 9: Accounting for Company Income Tax

Question 1

McDougall Ltd shows a deferred tax liability of $25 000 in its financial reports.This could have arisen from:

A) making a payment of interest in advance in respect of the following financial year
B) making a provision for doubtful debts when the debts have not yet been written off
C) an unexpected gain from the sale of land owned by the Company
D) an under-statement of income tax payable in a prior year

Answer 1

A

Question 2

A temporary difference arises due to:

A) the timing difference between the end of the financial year and when the income tax payable is paid
B) a difference between the amounts of the accounting expenses and the tax deductions of a company which will be reversed in future periods
C) a difference between the amounts of the accounting expenses and the tax deductions of a company which will never be reversed
D) a difference in the amount of the deferred tax assets and the deferred tax liabilities

Answer 2

B

Question 3

The lack of relevance to users of financial statements is seen as:

A) an advantage of the statement of financial position approach to income tax allocation
B) a criticism of the statement of financial position approach to income tax allocation
C) a detriment when conducting empirical research on tax-effect accounting
D) necessary in an attempt to avoid transparency in financial reporting

Answer 3

B

Question 4

Accounting Profit and Taxable Income can often differ because:

A) a tax deduction is not allowed for bad debts
B) revenue received in advance is not subject to tax
C) general purpose financial reporting and the income tax system have differing objectives
D) the Australian Taxation Office does not recognise depreciation as a legitimate expense

Question 5

Examine the following equations.
For assets:
(a)carrying amount < tax base gives rise to deferred tax liability
(b)tax base < carrying amount gives rise to deferred tax asset
For liabilities:
(c)carrying amount < tax base gives rise to deferred tax asset
(d)tax base < carrying amount gives rise to deferred tax liability

A) Only (a) and (c) are correct
B) Only (b) and (d) are correct
C) All are correct
D) (d) is correct

Question 6

Jordyn Ltd acquired land in 20X9 for a cash payment of $240 000.In 2011,Jordyn Ltd revalued that land to $340 000.If the company income tax rate is 30%,the following entry should be made:

A)
$\begin{array} { l l } \text { Dr Land } & \$ 30000 \\\text { Cr DeferredTax Liability } && \$ 30000\end{array}$
B)
$\begin{array}{llr} \text { Dr Revaluation Surplus } &\$ 30000\\ \text { Cr Deferred Tax Liability } &&\$ 30000\\\end{array}$

C)
$\begin{array}{llr} \text { Dr Revaluation Reserve } &\$ 30000\\ \text { Cr Deferred Tax Asset } &&\$ 30000\\\end{array}$


D) No entry is required

Question 7

Income tax expense is:

A) the amount of tax paid to the government during the current reporting period
B) shown in the income statement
C) calculated by applying the company income tax rate to taxable income
D) the amount that must be paid to the government in respect of the current income tax year

Question 8

Bonnie Ltd has accrued a liability for long service leave of $9000 in Year 1.No actual payments for long service leave have yet been paid.Bonnie Ltd's profit before tax is $75 000.The company tax rate is 30%.At the end of year 1,Bonnie Ltd should make the following entry:

A)
$\begin{array}{l}\begin{array}{ll}\text { Dr Income Tax Expense } & \$ 22500 \\\text { Dr Deferred Tax Asset } & \$ 2700\end{array}\\\text { Crincome Tax Pavable }&\$ 2520\end{array}$

B)
$\begin{array}{lll}\text { Dr Income Tax Expense } & \$ 25200 & \\\text { Cr Deferred Tax Liability } & & \$ 2700 \\\text { Cr Income Tax Payable } && \$ 22500\end{array}$

C)
$\begin{array}{llr} \text { Dr Income Tax Expense} &\$ 22500\\ \text { Cr Income Tax payable } &&\$ 22500 \\\end{array}$

D)
$\begin{array}{llr} \text { Dr Income Tax Expense} &\$ 25200\\ \text { Cr Income Tax payable } &&\$ 25200 \\\end{array}$

Question 9

Consider each of the following separate situations.State whether each gives rise to a deferred tax asset (DTA)or a deferred tax liability (DTL).Give reasons for your answer and also indicate why and when any DTA or DTL will be reversed in the accounting records.
(i)Depreciation for accounting purposes exceeds depreciation allowed for income tax purposes
(ii) A provision for doubtful debts has been made for the first time
(iii) Goodwill is beingamortisedeach year
(iv) A loss has been incurred, for both accountingand taxation purposes, but the company expects to earn profits in each of the next two years

Question 10

What is the principal objective of the statement of financial position approach to income tax allocation?

A) ensure that the deferred tax liability and the deferred tax asset are measured reliably
B) assurance of proper financial statement presentation
C) to guarantee future economic benefits
D) to identify the current obligation

Question 11

Jensen Ltd has a depreciable asset that cost $300 000 at the beginning of Year 1.It has a useful life of 5 years and zero residual value.The company depreciates the asset on a straight-line basis for accounting purposes but for tax purposes claims a depreciation allowance calculated on the reducing-balance basis at a rate of 25%.The company tax rate is 30%.At the end of year 2,in respect of this asset,Jensen Ltd will show:

A) a deferred tax liability of $11 250
B) a deferred tax liability of $3375
C) a deferred tax asset of $3375
D) neither a deferred tax asset nor a deferred tax liability

Question 12

Permanent differences (between revenues and expenses for accounting and tax purposes):

A) can cause Deferred Tax Liabilities but not Deferred Tax Liabilities to arise
B) can cause both Deferred Tax Assets and Deferred Tax Liabilities to arise
C) can cause Deferred Tax Assets but not Deferred Tax Liabilities to arise
D) can cause neither Deferred Tax Assets nor Deferred Tax Liabilities to arise

Question 13

A company has a provision for long service leave of $150 000.This amount was recognised as an expense when the provision was created but is deductible for income tax purposes when the leave is taken.If an employee takes long service leave and is paid an amount of $30 000 (and the company income tax rate is 30%),the following entry should be made:

A)
$\begin{array}{llr} \text { Dr Income Tax Payable } &\$ 9000\\ \text { Cr Deferred Tax Liability } & &\$ 9000\\\end{array}$

B)
$\begin{array}{llr} \text { Dr Deferred Income Tax Expense } &\$ 9000\\ \text { Cr Deferred Tax Asset } & &\$ 9000\\\end{array}$


C)
$\begin{array}{llr} \text { Dr Deferred Tax Asset } &\$9000\\ \text { Cr Deferred Income Tax Expense} & &\$9000\\\end{array}$

D)
$\begin{array}{llr} \text { Dr Deferred Tax Liability } &\$ 9000\\ \text { Cr Income Tax Payable } &&\$ 9000\\\end{array}$

Question 14

When calculating income tax expense under the statement of financial position approach to income allocation,which of the following formulae is used?

A) Income tax payable minus deferred income tax expense
B) Current income tax expense plus deferred income tax expense
C) Deferred income tax expense minus income tax payable
D) Temporary differences plus permanent differences

Question 15

According to AASB 112,the prepayment of rent of $2000 that is claimed as a tax deduction immediately upon payment (assuming an income tax rate of 30%)will give rise to:

A) a Deferred Tax Liability of $600
B) a Deferred Tax Liability of $600 and a credit to Income Tax Payable of $600
C) a Deferred Tax Asset of $600
D) neither a Deferred Tax Liability nor a Deferred Tax Asset

Question 16

Jethro Ltd has accrued a liability for warranty expense of $7000 in year 1 and a further $11 000 in year 2.During year 2,Jethro paid out $5000 for the cost of meeting warranty claims arising from sales made in year 1.Jethro's profit before tax in year 1 was $200 000 and in year 2 was $250 000.The company tax rate is 30%.At the end of year 2,Jethro should make the following entry:

A)
$\begin{array}{ll}\text { Dr Income Tax Expense } & \$ 78900 \\\text { Cr Deferred Tax Asset } && \$ 3300 \\\text { Cr Retained Earnings } && \$ 600 \\\text { Cr Income Tax Payable } && \$ 75000\end{array}$

B)
$\begin{array}{ll}\text { Dr Income Tax Expense } & \$ 75000 \\\text { Dr Deferred Tax Asset } & \$ 1200\\\text { Cr Income Tax Pavable }&&\$76200\end{array}$

C)
$\begin{array} { c c c } \text { Dr Income Tax Expense } & \$ 75000 & \\\text { Cr Deferred Tax Asset } & & \$ 3300 \\\text { Cr Income Tax Payable } && \$ 71700\end{array}$

D)
$\begin{array} { c c c } \text { Dr Income Tax Expense } & \$ 75000 & \\\text { Cr Deferred Tax Asset } & & \$ 1200 \\\text { Cr Income Tax Payable } && \$ 73800\end{array}$

Question 17

Explain the meaning and significance of each of the following terms in accounting for company income tax:
(i)Tax payable method
(ii) Tax Allocation-the balance sheet approach
(iii) Deferred tax asset
(iv) Deferred tax liability
(v)Tax base
(vi) $\text { Permanent difference }$

Question 18

Compare and contrast the Tax Payable and Tax Allocation - Balance Sheet Approach methods of accounting for income tax.Which method is required under Australian Accounting Standards? Outline the main arguments for and against each of these methods.

Question 19

A difference between the amounts of the accounting expenses and the tax deductions of a company which will be reversed in future periods indicates:

A) unethical accounting practices
B) a permanent difference
C) a greater annual income tax expense
D) a temporary difference

Question 20

AASB 112 requires that:

A) current and deferred tax expense are reported as one figure 'income tax expense'
B) current and deferred tax expense are disclosed separately
C) deferred tax expense is not identifiable in the financial reports
D) current tax expense is not identifiable in the financial reports

Question 21

Discuss the results of empirical research that examines whether tax-effect accounting should continue to be required.

Question 22

Empirical research on whether tax-effect accounting should continue to be applied indicates that:

A) share prices are more highly associated with taxable income, and therefore financial reports should conform to the taxation treatments
B) share prices are more highly associated with accounting income, and therefore accounting standards should not be changed
C) share prices are equally associated with both accounting and taxable income, and therefore both accounting and taxation income should be reported in the financial reports
D) share prices are unrelated to either accounting or taxation income

Question 23

Unused (carried forward)tax losses:

A) sometimes give rise to a deferred tax liability
B) sometimes give rise to a deferred tax asset
C) always give rise to a deferred tax asset
D) always give rise to a deferred tax liability

Question 24

Able Ltd has an asset in its books with a carrying amount of $120 000 and a tax base of $90 000.The income tax rate has been 30% but in the current year it has been increased to 40%.Able Ltd should make the following entry in its books:

A)
$\begin{array}{llr} \text { Dr Deferred Tax Liability} &\$ 3000 \\ \text {Cr Deferredincome Tax Exnense } &&\$ 3000\\\end{array}$

B)
$\begin{array}{llr} \text { Dr Deferred Tax Asset } &\$ 3000\\ \text { Cr Deferred Income Tax Liability} & &\$ 3000\\\end{array}$

C)
$\begin{array}{llr} \text { Dr Deferred Tax Asset } & \$ 3000\\ \text {Cr Deferred Income Tax Expense } && \$ 3000\\\end{array}$

D)
\begin{array}{llr} \text { Dr Deferred Income Tax Expense } &\$ 3000\\ \text { Cr Deferred Tax Liability} &&\$ 3000\\\\end{array}

Question 25

Accounting standards require disclosure of the amount of:

A) deferred tax expense (or revenue) relating to changes in tax rates or tax laws
B) current tax expense (or revenue)
C) any adjustments for the current tax of prior reporting periods
D) all of the above

Question 26

Deferred tax assets and deferred tax liabilities:

A) may be offset for presentation in the financial statements
B) cannot both arise in the one business
C) usually offset one another in amount
D) must always be disclosed separately in the financial statements