Question 1

The generally accepted (a)accounting rule and (b)tax rule for development expenditure are:

Accepted Answer

The generally accepted accounting rule for development expenditure is to capitalize and amortize it over its useful life, while the tax rule allows for a deduction when the expenditure is paid for. Therefore, choice A which suggests capitalizing and amortizing for accounting purposes and a tax deduction when paid for is the most appropriate option.

Question 2

Tissues Ltd has a depreciable asset that is estimated for accounting purposes to have a useful life of 8 years.For taxation purposes the useful life is 5 years.The asset was purchased at the beginning of year 1,there is no residual value,and the straight-line method of depreciation is used for both tax and accounting purposes.The tax rate is 30% and the cost of the asset is $100 000.What is the amount of the deferred tax liability account generated by this asset at the end of years 1,2 and 3?

Accepted Answer

The deferred tax liability arises because the tax depreciation is faster than the accounting depreciation. For accounting, the annual depreciation is $12,500 ($100,000/8 years), and for tax, it is $20,000 ($100,000/5 years). The difference creates a temporary difference of $7,500 per year. The deferred tax liability is 30% of the cumulative temporary difference: Year 1: $7,500 * 30% = $2,250; Year 2: $15,000 * 30% = $4,500; Year 3: $22,500 * 30% = $6,750.

Question 3

A company has a loan with a carrying value of $60 000.The payment of the loan is not deductible for tax purposes.The tax rate is 30%.What is the tax base for this item?

Accepted Answer

The tax base of a loan is the amount of the obligation that is recognized for tax purposes. Since the payment of the loan is not deductible for tax purposes, the carrying value of the loan ($60,000) is also its tax base.

Question 4

A deductible temporary difference is one that will result in:

Accepted Answer

A deductible temporary difference results in a decrease in income tax payable in future periods because it leads to future tax deductions when the asset or liability is settled.

Question 5

A company has received $40 000 for subscription revenue in advance and recorded a liability account 'revenue received in advance'.Revenue is taxed when it is received.The tax rate is 30%.What is the tax base for this item?

Accepted Answer

The answer of A company has received $40 000 for...

Question 6

Bulldog Supplies Ltd has an item of equipment that has a carrying value of $80 000.For taxation purposes the asset's net value is $60 000 and deferred tax liabilities of $3000 had previously been recorded.Bulldog also has accrued interest revenue of $5000 that will not be taxed until it is received in cash.The tax rate is 30%.What is the journal entry to record the tax effect?

Accepted Answer

The temporary difference for the equipment is $20,000 ($80,000 - $60,000), leading to a deferred tax liability of $6,000 ($20,000 x 30%). Since $3,000 was already recorded, an additional $3,000 is needed. The accrued interest revenue of $5,000 creates a deferred tax liability of $1,500 ($5,000 x 30%). The total tax effect is $4,500 ($3,000 + $1,500), recorded as an increase in deferred tax liability.

Question 7

A deferred tax asset arises if:

Accepted Answer

The answer of A deferred tax asset arises if:
...

Question 8

Snifful Industries has a depreciable asset that is estimated for accounting purposes to have a useful life of 7 years.For taxation purposes the useful life is 3 years.The asset was purchased at the beginning of year 1,there is no residual value,and the straight-line method of depreciation is used for both tax and accounting purposes.The tax rate is 30% and the cost of the asset is $210 000.What is the amount of the deferred tax liability account generated by this asset at the end of years 2,3 and 4?

Accepted Answer

To calculate the deferred tax liability, we need to find the difference in depreciation expenses between the two methods.

For the accounting method: 
Depreciation expense per year = Cost / Useful life = $210,000 / 7 = $30,000 per year

For the tax method: 
Depreciation expense per year = Cost / Useful life = $210,000 / 3 = $70,000 per year

So the difference each year is: 
Year 1: $40,000 
Year 2: $40,000 
Year 3: $40,000 
Year 4: $0

To calculate the deferred tax liability, we need to multiply these differences by the tax rate of 30%.

At the end of year 2: 
Deferred tax liability = $40,000 * 30% = $12,000

At the end of year 3: 
Deferred tax liability = ($40,000 * 2) * 30% = $24,000

At the end of year 4: 
Deferred tax liability = $0 (the difference between depreciation expenses is $0 in year 4)

Question 9

AASB 112 uses what term to describe the method for accounting for taxes that it mandates?

Accepted Answer

The answer of AASB 112 uses what term to describe...

Question 10

A taxable temporary difference is one that will result in:

Accepted Answer

A taxable temporary difference is one that will result in an increase in income tax payable in future reporting periods when the carrying amount of the asset or liability is recovered or settled. This is because the temporary difference between the carrying amount of the asset or liability and its tax base will reverse in the future, and the resulting taxable amount will lead to higher income tax payable.

Question 11

The tax base is defined in AASB 112 as:

Accepted Answer

The tax base is defined as the amount attributed to an asset or liability for tax purposes, according to AASB 112. It is different from the carrying amount of the asset or liability for accounting purposes.

Question 12

The correct method for calculating the amount of a deferred tax liability or asset may be expressed as a formula as follows:

Accepted Answer

The correct formula for calculating the amount of a deferred tax liability or asset is to subtract the tax bases of assets or liabilities from their carrying amounts, and then multiply the result by the tax rate. This can be expressed as (Carrying amount of assets or liabilities - tax bases of assets or liabilities) × tax rate, which is option A.

Question 13

Sinfonia Ltd made credit sales for this period of $100 000.The allowance for doubtful debts for these sales is $3000.For taxation purposes the amount provided for doubtful debts is not tax-deductible and the taxation office has included the $100 000 in taxable income.The tax rate is 30%.What is the deferral arising from this situation?

Accepted Answer

The deferral arises because the allowance for doubtful debts ($3000) is not tax-deductible, but for accounting purposes, it reduces the income. This creates a temporary difference that will reverse in the future when the debt is either written off or paid. The tax effect of this temporary difference ($3000) at a tax rate of 30% is a deferred tax asset of $900 ($3000 * 30%).

Question 14

Some items are treated as a deduction for tax purposes when they are paid but are recognised as expenses when they are accrued for accounting purposes.Which of the following items are of that type?

Accepted Answer

Long-service leave is typically accrued over time but can be claimed as a tax deduction when it is paid out to the employee. This creates a timing difference between tax and accounting recognition.

Answer: D
 Entertainment expenses are often deductible for tax purposes when they are incurred, but may only be recognised as an expense when they are paid. This creates a timing difference between tax and accounting recognition.

B and C are not examples of items that are treated as deductions for tax purposes when paid but recognised as expenses when accrued. Goodwill amortisation and depreciation are treated as expenses for both tax and accounting purposes when they are incurred.

Question 15

Under the approach of AASB 112 to accounting for income taxes,a deductible temporary difference creates which account?

Accepted Answer

A deductible temporary difference means that the tax deduction will be available in future periods when the asset/liability is realized or settled. This creates a deferred tax asset on the balance sheet, reflecting the future tax benefit that the company will receive.

Question 16

The AASB 112 approach has been adopted because:

Accepted Answer

The AASB 112 approach has been adopted because it is considered consistent with the AASB Conceptual Framework. This framework provides guidance for developing and revising accounting standards that are of high quality, transparent and relevant to users. The AASB 112 approach aligns with this framework and is therefore considered an appropriate approach. The other options mentioned in the question are not related to the reason for adopting the AASB 112 approach.

Question 17

A change in tax rates does not require any change in the carrying amount of deferred tax assets and deferred tax liabilities.

Accepted Answer

A change in tax rates can impact the carrying amount of deferred tax assets and deferred tax liabilities since they are calculated based on the current tax rate. A change in tax rate can result in a change in the future tax liability or tax benefit, affecting the carrying amount of deferred tax assets or deferred tax liabilities.

Question 18

Under the approach of AASB 112 to accounting for income taxes,a taxable temporary difference creates which account?

Accepted Answer

A taxable temporary difference occurs when the carrying amount of an asset or liability in the financial statements is different from its tax base, and this difference will result in taxable amounts in future periods. This means that the company will have to pay more taxes in the future than what is recorded in the financial statements. As a result, a deferred tax liability is created to recognize this future tax obligation. Therefore, the correct option is D - deferred tax liability.

Question 19

Some items are typically not allowable tax deductions but are recognised as an expense for accounting purposes.Which of the following items are of that type?

Accepted Answer

Goodwill amortisation is not typically deductible for tax purposes but is recognised as an expense in accounting.

Question 20

The amount of tax assessed by the ATO based on the entity's operations for the period will be reflected in which account?

Accepted Answer

The tax assessed by the ATO is a current tax liability and is reflected in the income tax payable account. The income tax expense account is used to record the tax expense for the period based on accounting standards, while deferred income tax and deferred tax liability accounts are used for differences between accounting and tax bases of assets and liabilities.

Quiz 18: Accounting for Income Taxes

The generally accepted (a) accounting rule and (b) tax rule for development expenditure are: