The balance sheets of Rainbow Ltd show:
$$\begin{array} { c c c }
& 31 \text { December 2018 } & 31 \text { December } 2019 \
\text { Current tax liability } & \$ 55000 & \$ 65000
\end{array}$$
The statement of profit or loss and other comprehensive income for the year ended 31 December 2019 shows income tax expense of $65 000.
What amount, in respect of income tax paid, will appear in the statement of cash flows for the year ended 31 December 2019? Assume tax is paid annually in arrears and there are no over- or under-provisions of tax.

Question

The balance sheets of Rainbow Ltd show:
$$\begin{array} { c c c } 
& 31 \text { December 2018 } & 31 \text { December } 2019 \
\text { Current tax liability } & \$ 55000 & \$ 65000
\end{array}$$
The statement of profit or loss and other comprehensive income for the year ended 31 December 2019 shows income tax expense of $65 000.
What amount, in respect of income tax paid, will appear in the statement of cash flows for the year ended 31 December 2019? Assume tax is paid annually in arrears and there are no over- or under-provisions of tax.

Quizplus · Accepted Answer

The income tax paid can be calculated by adjusting the income tax expense for the year by the change in the current tax liability. The current tax liability increased from $55,000 at the end of 2018 to $65,000 at the end of 2019, indicating that the tax paid during 2019 was less than the tax expense for the year by $10,000 (the increase in liability). Therefore, the income tax paid is the income tax expense ($65,000) minus the increase in current tax liability ($10,000), which equals $55,000.

The Balance Sheets of Rainbow Ltd Show The Statement of Profit or Loss and Other Comprehensive Income