Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.1

a) The income tax expense of an entity can be separated into the following two parts:
∙ current tax expense (or income), and
∙ deferred tax expense (or income)

b) Deferred tax is necessary because the total tax expense presented on the statement of
comprehensive income must reflect the tax incurred on the accounting profits – not the
current tax charge on taxable profits. There is often a difference between the tax expense
(tax incurred on accounting profits) and the current tax (tax charged on taxable profits)
because accounting profits are calculated in accordance with International Financial
Reporting Standards and taxable profits are calculated in accordance with tax legislation .

c) A deferred tax asset reflects the amount of taxes recoverable in future periods in respect of
deductible temporary differences, unused tax losses carried forward and unused tax
credits carried forward.

d) A deferred tax liability reflects the income taxes payable in future periods, in respect of
taxable temporary differences.

e) IAS 12 describes the measurement of deferred tax using the balance sheet approach. It
requires that deferred tax be measured based on the tax effects of the difference between: ∙
the carrying amount of the assets and liabilities, and
∙ the tax base of each of the assets and liabilities.

f) Taxable temporary differences are defined as those that will result in taxable amounts in
determining taxable profit (or tax loss) of future periods when the carrying amount of the
asset or liability is recovered or settled. IAS 12.5

g) Deductible temporary differences are defined as those that will result in amounts being
deducted in determining taxable profit (or tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled. IAS 12.5

h) The tax base is the amount attributed to that asset or liability for tax purposes. IAS 12.6

i) The tax base of an asset is the amount that will be deductible for tax purposes against any
taxable economic benefits that will flow to an entity when it recovers the carrying amount
of the asset. If those economic benefits will not be taxable, the tax base of the asset is its
carrying amount. IAS 12.7 Reworded

j) The tax base of a liability is its carrying amount, less any amount that will be deductible for
tax purposes in respect of that liability in future periods. If the liability is income received
in advance, the tax base of the resulting liability is its carrying amount, less any of the
revenue that will not be taxable in future periods. IAS 12.8 Reworded

k) An exempt temporary difference is a temporary difference on which deferred tax is no

recognised.
© Service & Kolitz, 2020 Chapter 6: Page 1
Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.1 continued …

l) If the carrying amount of an asset is measured at a fair value greater than cost, account for
deferred tax is accounted for on the portion above cost (i.e. CA – Cost) measured at the
rate at which it will be taxed in the future based on our intentions relating to the asset. If
the intention is to sell the asset instead of keeping and using the asset, we would need to
take care in measuring the deferred tax on the portion above cost, since this may be taxed
at different capital gains tax rates.

m) An exemption from the recognition of deferred tax arises:

∙ only on initial recognition (e.g. the cost of purchase);
∙ applies to any asset (not just noncurrent assets) or liability;
∙ does not apply to acquisitions arising through business combinations.
IAS 12.15 and IAS 12.24

n) A deferred tax asset may only be recognised if the recognition criteria are met, i.e. if the
∙ amount is reliably measurable; and the
∙ inflow of future economic benefits is probable.
© Service & Kolitz, 2020 Chapter 6: Page 2
Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.2

a) Deferred tax computation

CA TB TD DT (30%)
Asset-cost 300 300 0 0
Accumulated depreciation 100 180 80 24 Dr TE Cr DT 200 120 80 (Taxable) 24 (L)

b) Journal entries

Debit Credit
31 December 20X4
Income tax expense (E) 24 Deferred taxation: income tax (A/L) 24 Deferred income tax
adjustment for 20X4
c) Current tax computation

20X4 X 30%
Profit before taxation 1 000
Permanent differences 0
1 000
Temporary differences -
+ Depreciation 100
- Tax allowance (180)
Taxable profit 920 276 Dr TE Cr CTP

d) Journal entries

Debit Credit
31 December 20X4
Income tax expense (P/L) 276 Current tax payable: income tax (A/L) 276 Current income tax for
20X4

e) Statement of comprehensive income

CASHEW LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X4
C
Profit before taxation 1 000 Income tax expense (276 + 24) (300) Profit for the year 700

© Service & Kolitz, 2020 Chapter 6: Page 3

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.3

a) Deferred tax computation

CA TB TD DT (28%)
Depreciation/ tax deduction (20 000) (25 000) 5 000 1 400 Dr TE Cr DT

b) Current tax computation

20X4 X 28%
Accounting profit 400 000
Permanent difference
- Exempt dividend income (30 000)
370 000
Temporary difference
+ Depreciation 20 000
- Tax deduction (25 000)
Taxable profit 365 000 102 200 Dr TE Cr CTP c) Statement of comprehensive income

BUD LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X4
C
Profit before tax 400 000 Income tax expense (102 200 + 1 400 + 5 000) (108 600) Profit for
period 291 400

d) Notes

BUD LIMITED
NOTES TO THE FIANNCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X4
C
Taxation
Current tax 102 200 Deferred tax 1 400 Under-provision in prior year (95 000 – 90 000) 5 000
Income tax expense per statement of 108 600
comprehensive income

Tax rate reconciliation C % Tax on accounting profit / applicable rate (400 x 0,28) 112 000 28,0 Exempt
dividend income [(30 x 0,28)] / 400 (8 400) (2,1) Under provision in prior year (5 / 400) 5 000 1,25 Tax
expense / effective rate (108,6 /400) 108 600 27,15

© Service & Kolitz, 2020 Chapter 6: Page 4

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.4

a) Journal entries

Debit Credit
31 December 20X1
Income tax expense (E) W1 82 500 Current tax payable: income tax (L) 82 500 Current income tax for
20X1

Deferred taxation: income tax (A) W2 8 700 Income tax expense (E) 8 700 Deferred income tax
adjustment for 20X1

b) Disclosure

MAC D LIMITED
EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Note 20X1
C
Profit before tax 250 000 Income tax expense) (82 500 – 8 700 4 (73 800) Profit for the period 176
200 Other comprehensive income 0 Total comprehensive income 176 200

MAC D LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1

4. Income tax expense 20X1 C

Current tax 82 500 Deferred tax (8 700) Tax expense per statement of comprehensive income 73
800

Tax rate reconciliation: C % Applicable tax rate (ATR) 30 Tax effects of:
Profits before tax (C250 000 x 30%) 75 000 30 Exempt dividend income (C12 000 x 30%) (3 600)
(1.4) Non-deductible donations (C8 000 x 30%) 2 400 0.9 Tax expense per statement of
comprehensive income 73 800 29.5

Effective tax rate (ETR) 29.5%

© Service & Kolitz, 2020 Chapter 6: Page 5

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.4 continued . . .

Workings

W1. Calculation of current tax

20X1 X 30%
Profit before tax (given) 250 000 Exempt dividend income (12 000)
Non-deductible donations 8 000 246 000
Temporary differences: 29 000
Income received in advance
24 000
(taxable in current year) Prepaid
(10 000)
expense (deductible in current
40 000
year) Depreciation
(25 000)
Capital allowance

Taxable profit 275 000 82 500 (Dr TE Cr CTP)

W2. Calculation of deferred taxation

CA TB TD DT (30%)
Property, plant & equipment:
Balance – 1/1/20X1 ? ? ? ? Movement (balancing) (40 000) (25 000) 15 000 4 500 Dr DT Cr TE
Balance – 31/12/20X1 ? ? 4 500 Asset

Income received in advance:

Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 7 200 Dr DT Cr TE Balance – 31/12/20X1 (24
000) 0 24 000 7 200 Asset
Prepaid rent expense:
Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 3 000 Cr DT Dr TE Balance – 31/12/20X1 10
000 0 10 000 3 000 Liability

Telephone payable:
Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 0 Balance – 31/12/20X1 5
000 5 000 0 0

Interest income receivable:

Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 0 Balance – 31/12/20X1 7
000 7 000 0 0

Deferred tax summary PPE IRIA EPP Total Balance – 01/01/20X1 0 0 0 0 Movement (balancing)
Dr DT Cr TE
4 500 7 200 (3 000) 8 700 Balance – 31/12/20X1 4 500 7 200 (3 000) 8 700 Asset

© Service & Kolitz, 2020 Chapter 6: Page 6

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.5

a) Deferred tax working paper

CA TB TD DT (30%)
Property, plant & equipment:
Balance – 28/02/20X1 145 000 115 000 30 000 9 000 L Movement (25 000) 30 000 5 000 1 500 Cr DT;
Dr TE Balance – 28/02/20X2 120 000 85 000 35 000 10 500 L

Rent received in advance:

Balance – 28/02/20X1 2 000 0 2 000 600 A Movement 3 000 0 3 000 900 Dr DT; Cr TE Balance –
28/02/20X2 5 000 *0 5 000 1 500 A *(5 000 –
5 000)
Interest income receivable:
Balance – 28/02/20X1 0 0 0 0 Movement 20 000 20 000 0 0 Balance – 28/02/20X2
20 000 20 000 0 0 *(TB = CA)

Income
received in advance receivable Total
Deferred tax summary PPE Income
Balance – 28/02/20X1 (9 000) 600 0 (8 400) L Movement (balancing) (1 500) 900 0 (600) Cr DT; Dr TE
Balance – 28/02/20X2 (10 500) 1 500 0 (9 000) L

b) Current tax calculation

20X2 X 30%
Profit before tax 100 000 Temporary differences (2 000)
Add depreciation 145 000 – 120 000 Less Was taxed in 20X1
wear and tear Given Add rent received in
advance c/ balance Will be taxed in 20X2
Less rent received in advance o/ balance
 25 000
(30 000)
5 000
(2 000)
Taxable profit 98 000 29 400 Dr TE Cr CTP

© Service & Kolitz, 2020 Chapter 6: Page 7

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.5 continued …

c) Ledger accounts

Income tax expense Deferred tax liability

0
C Descriptio
n

29 Profit or
loss 30
000

Description C Description
C Description C
0
9 000 Balance b/d1 8
Income tax 400
expense 3 600
0

9 000 9
000
6

Current tax payable/

0 receivable: income tax 4
Deferred tax 3
30 000 Balance c/d2
 30 000 Balance b/d2 9 000

Current tax payable/ receivable:

income tax
C Description

39 400 Balance
b/f
Income
tax
expense
4

39 400

Notes 20X2
C
Non-current assets
Description C
10 000
Balance c/f 29 400

39 400
Balance b/f 39 400

1) 9 000 – 600: see workings in part (a): (opening

balance of deferred tax) 2) 10 500 – 1 500: see
workings in part (a): (closing balance of deferred
tax) 3) 9 000 – 8 400: see workings in part (a):
(deferred tax adjustment) 4) Current tax for 20X2

d) Statement of financial position

BLUE CHEESE LIMITED

EXTRACT FROM STATEMENT OF
FINANCIAL POSITION AT 28 FEBRUARY
20X2
20X1 C

Property, plant and equipment 120 000 145 000 Current assets
Interest receivable 20 000 0

Non-current liabilities
Deferred tax 10 9 000 8 400 Current liabilities
Current tax payable 39 400 10 000 Income received in advance 5 000 2 000
© Service & Kolitz, 2020 Chapter 6: Page 8
Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.5 continued …

e) Deferred tax note

BLUE CHEESE LIMITED

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 28 FEBRUARY 20X2
20X2 20X1
CC
10. Deferred taxation asset / (liability)
The deferred tax balance comprises temporary differences
caused by:
Property, plant and equipment (10 500) (9 000) Income received in advance 1 500 600 (9
000) (8 400)

f) Discussion

Plant and equipment

∙ The carrying amount of the plant and equipment represents the amount that will be
recovered in the form of economic benefits that will flow to the entity in future periods.

∙ The tax base of the plant and equipment is the amount that will be deductible for tax
purposes against the future taxable economic benefits.

∙ As the carrying amount of the plant and equipment exceeds its tax base, the amount of the
taxable economic benefits will exceed the amount that will be allowed as a deduction for
tax purposes. This difference is a taxable temporary difference and the obligation to pay
the resulting income taxes in future periods is recognised as a deferred tax liability.

Rent received in advance

∙ The carrying amount of the rent received in advance represents the obligation to provide
services in future periods.

∙ The tax base of the rent received in advance is the carrying amount of the liability, less any
amount of the revenue that will not be taxable in future periods. In other words, the tax
base represents the portion of the future economic benefits (past cash receipt) that will be
taxable in a future period.

∙ As the rent received in advance was not recognised as income for accounting purposes but
was taxed in the current period, the tax base is zero (C5 000 – C5 000) (i.e. no portion of
 the income received in advance account will be taxable in the future). This gives rise to a
deductible temporary difference and the tax ‘pre-paid’ is a deferred tax asset.

Interest income receivable

∙ The carrying amount of the interest income receivable represents the amount that will be
recovered in the form of economic benefits that will flow to the entity in future periods.

© Service & Kolitz, 2020 Chapter 6: Page 9

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.5 continued …

∙ The tax base of interest income receivable is equal to its carrying amount if the economic
benefits will not be taxable in future periods. Since all the interest income is taxed in the
current year, no portion of the amount receivable will be taxed in the future: the tax base
is therefore equal to its carrying amount
∙ The tax authority taxes income on the earlier of receipt or accrual, and thus the interest
income receivable is taxed in the current year (year of accrual). The accountant
recognises income in the same year (the year of accrual). There is thus no temporary
difference and no deferred tax.
© Service & Kolitz, 2020 Chapter 6: Page 10
Solutions to GAAP : Graded Questions Deferred taxation
equipment

Solution 6.6

a) Deferred tax calculation

DT A/ L or
DT adjustment
CA TB TD DT(30%)

Property, plant and

Balance - 1/1/20X9 213 000 174 000 39 000 11 700 DTL
(21 000) (15 000) 6 000 1 800 Dr DT; Cr TE
Depreciation/ wear and tear

Balance - 31/12/20X9 192 000 159 000 33 000 9 900 DTL

Year-end accruals
Balance - 1/1/20X9 9 000 0 9 000 2 700 DTA
- Income received in advance
- Expenses prepaid
9 000 0 9

Movement 540 Dr DT; Cr TE Balance - 31/12/20X9 12 000 0 12 000 3 600 DTA

- Income received in advance

- Expenses prepaid
Calculations: C
Total deferred tax balance at:
18 000 0

- 1/1/20X9 - 11 700 (L) + 2 700 (A) + 0 9 000 DTL - 31/12/20X9 - 9 900 (L) + 5 400 (A) – 1 800
(L) 6 300 DTL 2 700 Dr DT; Cr TE

b) Calculation of current tax

20X9 X 30%
Profit before tax 180 000
Permanent differences
Less dividend income (3 000)

Taxable accounting profits 177 000

Temporary differences 9 000
Add depreciation 21 000
Less wear and tear (15 000)
Add income received in advance 18 000
closing balance Less income received (9 000)
in advance opening balance Less
(6 000)
expenses prepaid closing balance

Taxable profit 186 000 55 800 Dr TE; Cr CTP

© Service & Kolitz, 2020 Chapter 6: Page 11

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.6 continued . . .

c) Journal entries

Debit Credit
31 December 20X9
Income tax expense (P/L) Part (b) 55 800 Current tax payable: income tax (L) 55 800 Current
income tax for 20X9

Deferred taxation: income tax (A) Part (a) 2 700 Income tax expense (P/L) 2 700 Deferred
income tax adjustment for 20X9

d) Deferred tax note

SALMON LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X9
20X9 20X8
CC
6. Deferred income taxation asset/ (liability)
The deferred tax balance is caused by temporary differences
relating to:
Property, plant and equipment (9 900) (11 700) Expenses prepaid (1 800) 0 Income received in
advance 5 400 2 700 (6 300) (9 000)

© Service & Kolitz, 2020 Chapter 6: Page 12

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.7

a) Deferred tax computation

 PPE: Plant CA TB TD DT
(40%)
20X2 Opening balance 0 0 0 0 Plant purchased 500 000 500 000 0 0 Depreciation (100 000) (250 000)
150 000 60 000 Dr TE Cr DT
20X2 Closing balance 400 000 250 000 150 000 60 000 Liability Depreciation (100 000) (150 000) 50
000 20 000 Dr TE Cr DT 20X3 Closing balance 300 000 100 000 200 000 80 000 Liability Depreciation
(100 000) (100 000) 0 0 20X4 Closing balance 200 000 0 200 000 80 000 Liability Depreciation (100
000) (0) 100 000 80 000 Dr DT Cr TE CA of asset sold (100 000) (0) 100 000
20X5 Closing balance 0 0 0 0

b) Calculation of current tax

20X5 20X4
Profit before tax 150 000 120 000 Temporary differences
+ depreciation 100 000 100 000 - wear and tear 0 (100 000) - profit on sale (SP: 100 000 – CA: 100
000) 0 n/a + recoupment (SP: 100 000 – TB: 0) 100 000 n/a Taxable profits 350 000 120 000
Tax rate 40% 40% Current income tax 140 000 48 000

c) Journal entries

20X5 20X4 20X3 20X2

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)

31 December

Income tax expense 140 000 48 000 Not required Not required Current tax payable: income tax (L)
(140 000) (48 000)
Recording current tax

Income tax expense (80 000) n/a 20 000 60 000 Deferred tax: income tax (A/ L) 80 000 n/a (20
000) (60 000) Recording deferred tax

© Service & Kolitz, 2020 Chapter 6: Page 13

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.7 continued . . .

d) Disclosure

BED LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
Notes
20X5 20X4
CC
Profit before tax 150 000 120 000 Income tax expense (20X5: 140 000 – 80 000) 3 (60 000) (48 000)
Profit for the year Other comprehensive income for the year Total comprehensive
90 000 72 000 00
income for the year
90 000 72 000

BED LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X5
Notes 20X5 20X4
ASSETS C C Non-current assets
Property, plant and equipment 0 200 000
EQUITY AND LIABILITIES
Non-current liabilities
Deferred taxation 4 0 80 000

BED LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
2. Accounting Policies C C

2.1 Deferred taxation

Deferred tax is recognised on differences between carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit and is accounted for
using the balance sheet method.

3. Income tax expense

Current tax 140 000 48 000 Deferred tax (80 000) 0 Income tax expense per statement of
comprehensive income 60 000 48 000

4. Deferred tax asset / (liability)

The deferred tax balance comprises temporary differences relating to:
Property, plant and equipment 0 (80 000)

© Service & Kolitz, 2020 Chapter 6: Page 14

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.7 continued …

Part B

a) Calculation of deferred taxation

No change

b) Calculation of current tax

20X5 20X4
 Profit before tax 150 000 120 000 - profit on sale Proceeds: 550 000 – CA: 100 000 (450 000) 0 +
taxable capital gain (Proceeds: 550 000 –cost 500 000) x 50% 25 000 0 Temporary differences 600 000 -
+ depreciation
500 000 N/A
- wear and tear
+ recoupment Proceeds limited to cost: 500 000 – TB: 0
100 000 100 000 0
(100 000)

Taxable profit 325 000 120 000 Tax rate 40% 40% Current income tax 130 000 48 000

Alternative workings relating to the sale (for use in the calculation of current income tax
above)

CA TB
Selling price Given 550 550
Carrying amount / tax base before the sale
Part C (a): deferred tax calculation 100 0 450 550

Included in accounting profits / taxable profits (450) (525)

Taxable capital gain (Proceeds: 550 – Cost: 500) x 50%
450
Recoupment Proceeds, limited to cost: 500 – TB: 0
Profit on sale Proceeds: 550 – CA 100
25
500
Profit that is exempt from tax 0 25

© Service & Kolitz, 2020 Chapter 6: Page 15

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.7 continued ….

Part B continued . . .

c) Journal entries

20X5 20X4 20X3 20X2

 Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
31 December

Income tax expense 130 000 48 000 Not required Not required Current tax payable: income tax (L)
(130 000) (48 000)
Recording current tax

Income tax expense (80 000) N/a 20 000 60 000 Deferred tax: income tax (A / L) 80 000 N/a (20
000) (60 000) Recording deferred tax

d) Disclosure

BED LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
Note
Calculations 20X5 20X4
CC
Profit before taxation 150 000 120 000 Income tax expense Per the note 3 (50 000) (48 000) Profit for
the year 100 000 72 000
Other comprehensive income for the year - - Total comprehensive income for the year 100 000 72 000

BED LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X5
Calculations Note 20X5 20X4
ASSETS C C Non-current assets
Property, plant and equipment Part (a) 0 200 000
EQUITY AND LIABILITIES
Non-current liabilities
Deferred taxation: income tax Part (a) 4 0 80 000

© Service & Kolitz, 2020 Chapter 6: Page 16

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.7 continued …

Part B continued . . .

BED LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
2. Accounting policies C C

2.1 Deferred taxation

Deferred tax is recognised on differences between carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for
using the balance sheet method.

3. Income tax expense

Current tax Part (b) 130 000 48 000 Deferred tax Part (a) (80 000) 0 Income tax expense per statement of
comprehensive income 50 000 48 000

Tax rate reconciliation: C % Applicable tax rate (ATR) 40% Tax effects of:
Profit before tax (150 000 x 40%); (120 000 x 40%) 60 000 48 000 Exempt portion of capital profit
(550 000-500 000) x 50% x 40% (10 000) 0 Income tax expense per statement of comprehensive income
50 000 48 000

(50 000 / 150 000) ;

Effective tax rate (48 000 / 120 000) 33.33% 40%

4. Deferred tax asset/ (liability)

The deferred tax balance comprises temporary differences relating to:

Property, plant and equipment 0 (80 000)

Comment from author:

The tax rate reconciliation would not normally have been needed for 20X4 since the effective tax rate
equals the applicable tax rate. The 20X4 tax rate reconciliation is provided, since IAS 1 Presentation of
financial statements requires that comparatives figures for all financial statement items.

© Service & Kolitz, 2020 Chapter 6: Page 17

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.8

Part A

a) Statement of comprehensive income

HOBBIT LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
20X1 20X0
Note C C
Profit before tax (497 000 – 5 000 + 6 000 – 10 000 + 20 000) 508 000 xxx Income tax expense (147 300
– 1 200) 3 (146 100) xxx Profit for the year 361 900 xxx Other comprehensive income for the year -
xxx Total comprehensive income for the year 361 900 xxx

b) Statement of financial position

HOBBIT LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X1
20X1 20X0
EQUITY AND LIABILITIES Note C C Non-current liabilities
Deferred taxation 10 10 800 12 000

c) Notes

HOBBIT LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1

3. Income tax expense 20X1 C

Current tax W1 147 300 Deferred tax (1 200) Income tax expense per statement of
comprehensive income 146 100

Tax rate reconciliation % C Applicable tax rate 30

Tax effects of:
Profit before tax /Applicable rate 508 000 x 30% 30,0 152 400 Income not subject to tax 30
000 x 30% (1,8) (9 000) Expenses disallowed for tax 9 000 x 30% 0,5 2 700 Tax expense /
effective rate 152 350 / 508 000 28,7 146 100

© Service & Kolitz, 2020 Chapter 6: Page 18

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.8 continued . . . c) Note

disclosure continued . . . 20X1 20X0

10. Deferred taxation asset/ (liability)

The deferred tax balance is caused by temporary differences relating to: C C

Plant W2 (10 500) (12 000) Prepaid expenses W2 (1 800) 0 Income received in advance W2 1 500 0
(10 800) (12 000)
Workings

W1. Current income tax expense

20X1 X 0,30
Profit before tax (497 000 - 5 000 + 6 508 000
000 - 10 000 + 20 000)

- Dividend income (exempt) (30 000) + Fines (not deductible) 9 000

Temporary differences: 4 000
+ Rent received in advance c/b (taxable
5 000
in current year) - Rates prepaid c/b
(6 000)
(deductible in current year) + Depreciation
35 000
(155 000 * – 120 000) - Wear & tear (115
(30
000 – 85 000)
000)

Taxable profit 491 000 147 300 Dr TE Cr CTP

* where CA: 155 000 = DTL: 12 000 / 0,30 + TB: 115 000

© Service & Kolitz, 2020 Chapter 6: Page 19

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.8 continued …

W2. Calculation of deferred tax

CA TB TD DT (30%)
Property, plant & equipment:
Balance – 1/1/20X1 155 000* 115 000 40 000 12 000 Liability Movement (balancing) (1 500) Dr
DT Cr TE Balance – 31/12/20X1 120 000 85 000 35 000 10 500 Liability *W1
Rent received in advance:
Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 1 500 Dr DT Cr TE Balance – 31/12/20X1 5 000
0 5 000 1 500 Asset

Prepaid rates expense:

Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 1 800 Dr TE Cr DT Balance – 31/12/20X1 6 000
0 6 000 1 800 Liability

Advertising payable:
Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 0 Balance – 31/12/20X1 10 000
10 000 0 0

Interest income receivable:

Balance – 1/1/20X1 0 0 0 0 Movement (balancing) 0 Balance – 31/12/20X1 20 000
20 000 0 0

Net movement on deferred tax = C1 500 (Dr) + C1 500 (Dr) – C1 800 (Cr) = C1 200 (Dr)

© Service & Kolitz, 2020 Chapter 6: Page 20

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.8 continued …

Part B

a) Statement of comprehensive income

HOBBIT LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
20X1
Note C
Profit before tax (497 000 – 5 000 + 6 000 – 10 000 + 20 000) 508 000 Income tax expense (144 300 + 1
800 - 3 000) 3 (143 100) Profit for the year 364 900 Other comprehensive income for the year - Total
comprehensive income for the year 364 900

b) Statement of financial position

HOBBIT LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X1
20X1 20X0
EQUITY AND LIABILITIES Note C C Non-current liabilities
Deferred taxation 10 10 800 12 000

c) Notes

HOBBIT LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1
20X1
3. Income tax expense C Current tax W1 144 300 Deferred tax
current year temporary differences W2.4 1 800 rate change W2.4 (3 000) Income tax
expense per statement of comprehensive income 143 100

Tax rate reconciliation: % C Applicable tax rate 30

Tax effects of:
Profit before tax / Applicable rate 508 000 x 30% 30,0 152 400 Income not subject to tax
30 000 x 30% (1,8) (9 000) Expenses disallowed for tax 9 000 x 30% 0,5 2 700 Rate
change Above (0,6) (3 000) Tax expense / effective rate 143 100 / 508 000 28,1 143 100

© Service & Kolitz, 2020 Chapter 6: Page 21

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.8 continued …

Notes continued . . .

10. Deferred taxation asset/ (liability) 20X1 20X0 The deferred tax balance is caused by temporary
differences relating to: C C Plant W2.1 (10 500) (12 000) Income received in advance W2.2 1 500 0
Prepaid expenses W2.3 (1 800) 0 (10 800) (12 000)

Workings

W1. Calculation of current tax expense

20X1 x 30%
Profit before tax Per SOCIE 508 000
- Dividend income (exempt) Given (30 000) + Fines (not deductible) Given 9
000
Temporary differences: (6 000)
+ rent received in advance: c/bal
5 000
(Taxable in current year) - rates
(6 000)
prepaid: c/bal (Deductible in current
25 000
year) + depreciation (145 000* – 120
(30
000) - wear & tear (115 000 – 85 000)
000)

Taxable profit 481 000 144 300 Dr TE Cr CTP

* where CA: 145 000 = DTL: 12 000 / 0,40 + TB: 115 000

© Service & Kolitz, 2020 Chapter 6: Page 22

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.8 continued . . .

Workings continued . . .

W2. Calculation of deferred tax

CA TB TD DT
W2.1 Property, plant & equipment:

Balance: 1/1/20X1 145 000 (2) 115 000 30 000 (1) 12 000 L (40%)
Rate change (3 000) Dr DT Cr TE 9 000 L (30%)
(decrease)
Balance:1/1/20X1 restated
Movement (balancing) 1 500 DR TE Cr DT Balance:31/12/20X1 120 000 85 000 35 000 10 500 L
(30%)

W2.2 Rent received in advance:

Balance:1/1/20X1 0 0 0 0 Movement (balancing) 1 500 Dr DT Cr TE Balance:31/12/20X1 5 000 0 5
000 1 500 A (30%)

W2.3 Prepaid rates expense:

Balance:1/1/20X1 0 0 0 0 Movement (balancing) 1 800 Dr TE Cr DT Balance:31/12/20X1 6 000 0 6
000 1 800 L (30%)

(1) 12 000 / 40% = 30 000

(2) 115 000 + 30 000 = 145 000 (Add the temporary differences since the DT balance was a liability)

Net movement on deferred tax

Rate change: C 3000 (Dr)
Temporary differences: C1 500 (Cr) - C1 500 (Dr) + C1 800 (Cr) = C1 500 (Cr)

© Service & Kolitz, 2020 Chapter 6: Page 23

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.9

a) Journal entries

Debit Credit
31 December X6
Income tax expense (E) W2 889 020 Current tax payable: income tax (A/L) 889 020
Providing for current income tax

Income tax expense (E) W1.6 1 980 Deferred tax: income tax (A/L) 1 980 Providing for
deferred tax

Current tax payable: income tax (A/L) Given 6 000 Income tax expense (E) 6 000
Overprovision of 20X5 current tax

b) Notes
 PERFECT BODY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X6
C
4
Income tax expense
.
Current tax 883 020
Current tax for 20X6 W2
889 020
(6 000)
Overprovision of Given
current tax in 20X5

Deferred tax W1.6 1 980 Income tax expense per the statement of comprehensive income
885 000

Tax rate reconciliation % C Applicable tax rate 30 Tax on profit at applicable rate W2: C2
820 000 x 0,30 30,0 846 000 Non-deductible donations C24 000 x 0,30 0.26 7 200 Exempt
dividend income C18 000 x 0,30 (0.19) (5 400) Depreciation on non-deductible building
C144 000 x 0,30 1.53 43 200 Overprovision of current tax in 20X5 Per above (0,21) (6 000)
Income tax expense per the statement of comprehensive income 31,38 885 000

Comment:
The rate reconciliation need not be provided in percentages and currency. You may choose which
method to present. Our suggestion would be as a currency as this is less time-consuming.

5. Deferred tax asset or (liability)

Equipment W1.3 (95 760) Income received in advance W1.4 22 950 Prepaid expenses
W1.5 (9 000) W1.6 (81 810)

© Service & Kolitz, 2020 Chapter 6: Page 24

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.9 continued …

Workings

W1 Deferred tax

CA TB TD DT(30%)
W1.1 Land
Balance: 31/12/X5 (4) 2 964 000 0 (2 964 000) 0 Exempt Movement 0 0 0 0 Balance: 31/12/X6 (1) 2 964 000 0 (2
964 000) 0 Exempt

W1.2 Admin buildings

Balance: 31/12/X5 (4) 2 064 000 0 2 064 000 0 Exempt Movement (1) (144 000) 0 144 000 0 Exempt Balance:
31/12/X6 (1) 1 920 000 0 1 920 000 0 Exempt

W1.3 Equipment
Balance: 31/12/X5 (2) 960 000 (3) 662 400 (1) 297 600 89 280 L Movement (1) (204 000) (1) (225 600) 21 600 6
480 Cr DT Balance: 31/12/X6 (1) 756 000 (1) 436 800 319 200 95 760 L

W1.4 Revenue received in advance

Balance: 31/12/X5 (6) 31 500 0 (1) 31 500 9 450 A Movement 13 500 Dr DT Balance: 31/12/X6 (1) 76 500 0 76
500 22 950 A

W1.5 Prepaid expenses

Balance: 31/12/X5 (5) 0 0 (5) 0 0 Movement (9 000) Cr DT Balance: 31/12/X6 (1) 30 000 0 (30 000) (9 000) L

W1.6 Summary of deferred tax C

Deferred tax balance at 31/12/X5 as per question Given or 89 280 L – 9 450 A 79 830 L Deferred tax balance
at 31/12/X6 95 760 L – 22 950 A + 9 000 L 81 810 L Movement: increase in deferred tax liability Dr TE; Cr
DT 1 980

Workings

(1) Given
(2) 756 000 + 204 000 = 960 000
(3) 436 800 + 225 600 = 662 400
(4) Balance back to the opening balances
(5) Since the DT o/balance was due only to temporary differences on the equipment & revenue received in
advance, the temporary difference and opening balances relating to prepaid expenses must have been nil. (6) Since
part of the DT balance at 31 December 20X5 was caused by a temporary difference of C31 500 relating to prepaid
expenses, and since the tax base for the prepaid expense would have been nil (the expense prepaid is allowed as a
deduction in the year of payment), the carrying amount must have been C31 500 (TD: 31 500 – TB: 0 = CA: 31
500).

© Service & Kolitz, 2020 Chapter 6: Page 25

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.9 continued …

W2 Current tax

20X6 x 30%
Profit before tax 2 892 000 – 90 000 2 820 000 - Dividends received (18 000) +
Donations 24 000 + Depreciation on administration building (not deductible)
144 000

Temporary differences (6 600)

+ Depreciation on
204 000
equipment Given
- Tax allowance on
Recognised as income in
(225
equipment
20X6, but already taxed in 600)
- Revenue received in
advance: o/balance + 20X5 (see W1.4) Taxable in
20X6, but to be recognised (31 500)
Revenue received in
as income in future
advance: c/balance - 76 500
Prepaid expenses: Deductible in 20X6, but to be
recognised as expense in
c/balance (30 000)
future
Given
Taxable profit 2 963 400 889 020 Dr TE Cr CTP

© Service & Kolitz, 2020 Chapter 6: Page 26

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.10

MEMORANDUM
To: Managing Director
From: The accountant
Date: 5 January 20X9

Dear Sir

This is in response to your request for a memo outlining the reasoning behind the deferred tax
asset of C450 000.

a) Deferred tax compared to current tax

Deferred tax is different to current tax:

∙ A deferred tax asset does not represent any monies actually receivable from the tax
authority.
∙ Deferred tax is merely a book entry that attempts to show the tax expense and tax liability
on the accrual basis, rather than on the basis of the tax legislation.
∙ A current tax asset, on the other hand, reflects an amount currently receivable from the tax
authority based on the tax legislation (and could happen as a result of an overpayment of
tax).

b) Calculation of deferred tax

Deferred tax is calculated, using the balance sheet approach, by:

∙ first calculating the difference between the carrying amount of all line items causing
temporary differences and their tax bases;
∙ then multiplying this difference (referred to as a temporary difference) by the tax rate to get
a deferred tax balance.
∙ This is done for all line items and all such deferred tax balances are added together to get
the deferred tax balance that is reflected in the statement of financial position.

c) Explanation of ‘income received in advance’ in terms of the Conceptual Framework

In terms of the Conceptual Framework for Financial Reporting, a liability is

∙ A present obligation of the entity
∙ To transfer an economic resource
∙ As a result of a past events

The present obligation is the duty or responsibility to provide the goods (the sail) in the
future. The economic resource that will be transferred is the inventory (again the sail). The
past event is the receipt in advance of the cash.

d) Explanation of tax base of ‘income received in advance’

According to IAS12, the tax base of a liability depends on what the liability represents: ∙ For
liabilities that do not represent income received in advance, the tax base ‘is its carrying
amount, less any amount that will be deductible for tax purposes in respect of that liability in
future periods’; and
∙ For liabilities that represent income which is received in advance, the tax base ‘is its
carrying amount, less any amount of the revenue that will not be taxable in future
periods’.

© Service & Kolitz, 2020 Chapter 6: Page 27

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.10 continued . . .

Our liability is income received in advance and since the tax authorities taxed the receipt in
20X8, the tax base at 31 December 20X8 is nil (the CA of C1 500 000 – portion already taxed
and thus won’t be taxed in future: C1 500 000 = nil).

e) Type of temporary difference

According to IAS 12, deductible temporary differences are defined as ‘temporary differences
that will result in amounts that are deductible in determining taxable profit (tax loss) of future
periods when the carrying amount of the asset or liability is recovered or settled’.

The C1 500 000 is included in taxable profit for the year ended 31 December 20X8 but will
be included as income in the determination of profit before tax for the year ended 31
December 20X9. The amount will therefore not be taxed in 20X9 and will be deducted from
the accounting profit to calculate the taxable profit.
In terms of the Conceptual Framework for Financial Reporting, an asset is

∙ A present economic resource (a right that has the potential to produce economic benefits) ∙
Controlled by the entity
∙ As a result of past events

The present economic resource is evidenced by the right to a future reduction in tax that
otherwise would have been payable in 20X9. It is controlled by the entity in that there is an
advance payment of tax. The past event is the receipt of the C1 500 000 in advance.

Sincerely

_______________
The accountant

© Service & Kolitz, 2020 Chapter 6: Page 28

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.11

a) Journal entries

Debit Credit
31 December 20X4
Deferred tax: income tax (A) W1: 4 800 000 x 40% 1 920 000 Income tax expense (E) 1 920 000
Deferred tax asset recognised due to tax loss created in 20X4

31 December 20X5
Income tax expense (E) 1 440 000 Deferred tax: income tax (A) 1 440 000

Deferred tax adjustment caused by utilisation of tax loss brought

forward from 20X4
31 Dec 20X5 written-down to nil
Income tax expense (E) W1: DTA balance at 480 000
 Deferred tax: income tax (A) 480 000 Balance of the unused deferred tax asset written down at the
end of the CY because there is no longer an expectation of future economic benefits

© Service & Kolitz, 2020 Chapter 6: Page 29

Solutions to GAAP : Graded Questions Deferred taxation
STATEMENTS FOR THE
YEAR ENDED 31
DECEMBER 20X5
Solution 6.11 continued …
15. Deferred tax asset/
b) Disclosure (liability)

SIMPLE LIMITED Deferred tax arose due to the 20X5 C

NOTES TO THE FINANCIAL following: 20X4 C

Tax loss 0 1 920 000

A deferred tax asset of C480 000 on an unused tax loss of C1 200 000 at 31 December 20X5 is not recognised
due to future economic benefits from a tax loss no longer being expected. This deferred tax asset has no
expiry date.

25. Income tax expense 20X5 20X4 C C

- Current tax
 W1 0 0
Current year - Deferred tax
Part (a) above 1 440 000 (1 920 000)
Current year movement in temp differences Prior year DTA
Part (a) above 480 000 0
written-down Tax expense per statement of comprehensive income 1 920 000 (1
920 000)

Tax rate reconciliation

Applicable tax rate C 40% Tax effects of
Profit before tax 20X5: 9 600 000 x 40% 20X4: 1 200 20X5&20X4: 6 000 000 x 40% (2 400 000) (2 400
000 x 40% 000)
3 840 000 480 000

Less exempt dividend income

Prior year DTA written-down Per above 480 000 1 920 000 (1 920 000)
(1 920 000) / 1 200 000
Effective tax rate 20X5: 1 920 000 / 9 600 000 20X4: 20% (160%)

© Service & Kolitz, 2020 Chapter 6: Page 30

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.11 continued …

Workings:

W1 Calculation of current tax

20X5 20X4
CC
Profit before tax Given 9 600 000 1 200 000 Exempt dividend income Given (6 000 000) (6 000 000) 3
600 000 (4 800 000)
Temporary differences Balancing 0 0 Taxable profit / (tax loss) before tax loss b/f Given 3 600 000 (4 800
000) Tax loss b/f Given (4 800 000) 0 Taxable profit / (tax loss carried forward) (1 200 000) (4 800 000)

Current tax at 40% nil nil W2 Calculation of deferred tax

DT on Tax loss amount Tax base difference (40%)

Carrying Temporary Deferred tax
 31/12/20X4 0 4 800 000 4 800 000 1 920 000 Asset Movement 0 (3 600 000) (3 600 000) (1 440 000)
Dr TE Cr DT 31/12/20X5 0 1 200 000 1 200 000 480 000 Asset

© Service & Kolitz, 2020 Chapter 6: Page 31

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.12

a) Calculation of current tax and deferred tax

W1 Calculation of current tax

20X7 20X6 20X5

CCC
Profit before tax 36 000 24 000 16 800 Exempt dividend income (12 000) (12 000) (12 000)
Temporary differences (PPE) (W2) (9 600) (4 800) (16 800) Assessed tax loss brought forward (4
800) (12 000) 0 Taxable profit/ (tax loss) 9 600 (4 800) (12 000)

Current income tax at 30% 2 880 0 0 W2 Calculation of deferred tax

Deferred tax Tax base Temporary

(30%) W2.1 PPE difference
Carrying amount
01 Jan 20X5
84 000 108 000 24 000 7 200 Asset
Balance:

Movement (7 200) (24 000) (16 800) (5 040) Dr TE Cr DT

Balance: 31 Dec 20X5
76 800 84 000 7 200 2 160 Asset

Movement (19 200) (24 000) (4 800) (1 440) Cr DT Dr TE

Balance: 57 600 60 000 2 400 720 Asset
31 Dec 20X6

Movement (14 400) (24 000) (9 600) (2 880) Dr TE Cr DT

Balance: 43 200 36 000 (7 200) (2 160) Liability 0 0 0 0
31 Dec 20X7

W2.2 Tax loss Balance:

01 Jan 20X5
Movement 3 600 Dr DT Cr TE
Balance: 0 12 000 12 000 3 600 Asset
31 Dec 20X5 (W1)

Movement 0 (2 160) Dr TE Cr DT
Balance: 0 4 800 4 800 1 440 Asset
31 Dec 20X6 (W1)

Movement 0 (1 440) Dr TE Cr DT
Balance: 0000
31 Dec 20X7

© Service & Kolitz, 2020 Chapter 6: Page 32

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.12 continued …

W2.3 Summary
PPE Tax loss Total
Total Recognised Unrecognised Total Recognised Unrecognised Total Recognised Unrecognised

abc def ghi

O/ 7 200 0 7 200 000 7 200 0 7 200

balance
20X5 (5 040) 0 (5 040) 3 600 0 3 600 (1 440) 0 (1 440)
Movement

C/ 2 160 0 2 160 3 600 0 3 600 5 760 0 5 760

balance
20X5 (1 440) 0 (1 440) (2 160) 0 (2 160) (3 600) 0 (3 600)
Movement

C/ 720 0 720 1 440 0 1 440 2 160 0 2 160

balance
20X6 (2 880) (2 160) (720) (1 440) 0 (1 440) (4 320) (2 160) (2 160)
Movement
:
 C/ (2 160) (2 160) 0 000 (2 160) (2 160) 0
balance
20X7

Please note:
When the unrecognised portion of a DTA is reduced (see columns c and f), this means that some of what was
previously unrecognised will now need to be recognised (i.e. see column c: C7 200 DTA relating to PPE was
initially not recognised, but by the end of 20X5, the portion that was unrecognised was only C2 160: this therefore
means that C5 040 of the DTA was reversed and since this DTA was not recognised in the first place, we will need
to show a journal for both the reversal and a belated recognition of the C5 040 – see journals).

b) Journal entries

Debit Credit
31 December 20X5
Income tax expense (E) W2.1 5 040 Deferred tax: income tax (A/L) 5 040 DT adjustment caused by
PPE: DTA reversing due to temporary
differences reversing (20X5) NOTE 1

Deferred tax: income tax (A/L) W2.3: column (c) 5 040 Income tax expense (E) 5 040 Prior year
PPE: DTA recognised to the extent that it has now reversed
(jnl above): PPE (20X5)

Deferred tax: income tax (A/L) W2.2 3 600 Income tax expense (E) 3 600 DT adjustment caused by
Tax loss: DTA arising (20X5)

Income tax expense (E) W2.3: column (f) 3 600 Deferred tax: income tax (A/L) 3 600 DT
adjustment to reverse the Tax loss: DTA (20X5)

© Service & Kolitz, 2020 Chapter 6: Page 33

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.12 continued …

b) Journal entries continued …

31 December X6
Income tax expense (E) W2.1 1 440 Deferred tax: income tax (A/L) 1 440 DT adjustment caused by
PPE: DTA reversing due to temporary
differences reversing (20X6) NOTE 1

Deferred tax: income tax (A/L) W2.3: column (c) 1 440 Income tax expense (E) 1 440 Prior year
PPE: DTA recognised to the extent that it has now reversed
(jnl above): PPE (20X6)

Income tax expense (E) W2.2 2 160 Deferred tax: income tax (A/L) 2 160 DT adjustment caused by
Tax loss: DTA reducing due to tax loss partially
used (20X6) NOTE 1

Deferred tax: income tax (A/L) W2.3: column (f) 2 160 Income tax expense (E) 2 160 Prior year Tax
loss: DTA recognised to the extent that it has now been
used (i.e. jnl above): tax loss (20X6)

31 December X7
Income tax expense (E) W2.1 2 880 Deferred tax: income tax (A/L) 2 880 DT adjustment caused by
PPE: DTA reversed (720) and a DTL (2 160)
created due to temporary differences reversing: PPE (20X7) NOTE 1

Deferred tax: income tax (A/L) W2.3: column (c) 720 Income tax expense (E) 720 Prior year PPE:
DTA recognised to the extent that it has now reversed
(jnl above): PPE (20X7)

Income tax expense (E) W2.2 1 440 Deferred tax: income tax (A/L) 1 440 DT adjustment caused by
Tax loss: DTA reducing due to remaining tax
loss being used (20X7) NOTE 1

Deferred tax: income tax (A/L) W2.3: column (f) 1 440 Income tax expense (E) 1 440 Prior year Tax
loss: DTA recognised to the extent that it has now been
used (i.e. jnl above): tax loss (20X7)

Income tax expense E) W1 2 880 Current tax payable: income tax (L) 2 880 Current tax payable
20X7

NOTE 1: The journal is processed showing that a DTA asset was reversed (see W2.1 & W2.2). The problem is that
since the company did not want to recognise deferred tax assets, the original C7 200 DTA on PPE (arising in
20X4) and the original C3 600 DTA on the tax loss (arising in 20X6) that are subsequently reversed were not
recognised in the first place! This is the reason for the next journals where the part of the DTA that is reversing is
now suddenly recognised. The effect is nil on the balances, but these journals are necessary since disclosure of this
movement is required.

© Service & Kolitz, 2020 Chapter 6: Page 34

Solutions to GAAP : Graded Questions Deferred taxation
STATEMENTS FOR
THE YEAR ENDED 31
Solution 6.12 DECEMBER 20X7
continued …
15. Income tax expense
c) Disclosure

GLASSY LIMITED 20X7 C 20X6 C

NOTES TO THE 20X5 C
FINANCIAL

Current tax 2 880 0 0 Deferred tax

Current year movement in temporary W2.3 4 320 3 600 1 440
differences

Current year DTA not recognised W2.3/ Jnls 0 0 3 600

Prior year unrecognised DTA now recognised W2.3/ Jnls (2 160) (3 600) (5 040)

Tax expense per statement of comprehensive income 5 040 0 0

Tax rate reconciliation

Applicable tax rate 30% 30% 30% Tax effects of:
Profit before tax (20X7: 36 000 x 30%) (20X6: 24 000 x 30%)
(20X5: 16 800 x 30%)
 10 800 7 200 5 040

Exempt dividend income (20X5 - 20X7: 12 000 x 30%) (3 600) (3 600) (3 600)
Current year DTA not recognised: tax loss 040)
Prior year unrecognised DTA now recognised
Per above 0 0 3 600 Per above (2 160) (3 600) (5

Tax expense per statement of comprehensive income 5 040 0 0 Effective tax rate (5 040 / 36 000)

14% 0% 0%

16. Deferred income tax asset/ (liability)

The deferred tax balance comprises tax on the following types of temporary differences: Property,
plant and equipment (2 160) 0 0 Tax loss 0 0 0 (2 160) 0 0

Comment:
The 20X6 financial statements would have required the following additional disclosure: “A deferred tax asset of
C720 relating to deductible temporary differences of C2 400 and a deferred tax asset of C1 440 relating to an
unused tax loss of C4 800 have not been recognised due to the fact that sufficient future taxable profits are not
expected in the foreseeable future to be able to take advantage of any future tax savings offered by these deferred
tax assets (20X5: Unrecognised deferred tax amounts were C2 160 and C3 600 respectively). These deductible
temporary differences and unused tax losses have no expiry dates.”

© Service & Kolitz, 2020 Chapter 6: Page 35

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.13

a) Calculation of current tax and deferred tax

W1 Calculation of current tax

20X3 20X2 20X1

CCC
Profit before tax (20 000) (10 000) 10 000 Exempt income (20 000) (20 000) (20 000) Assessed tax
loss brought forward (140 000) (110 000) (100 000) Taxable profit/ (tax loss) (180 000) (140 000)
(110 000)

Current income tax at 30% 0 0 0 W2 Calculation of deferred tax

Deferred tax at W2.1 Tax loss Tax base Temporary

30% Carrying amount difference

Balance: 1 Jan 20X1 0 100 000 100 000 30 000 Asset Movement 3 000 Dr DT Cr TE Balance: 31 Dec 20X1 0
110 000 110 000 33 000 Asset Movement 0 9 000 Dr DT Cr TE Balance: 31 Dec 20X2 0 140 000 140 000 42
000 Asset Movement 0 12 000 Dr DT Cr TE Balance: 31 Dec 20X3 0 180 000 180 000 54 000 Asset
 Total Recognised Unrecognis Total
ed

W2.2 Summary
Other temporary differences
O/ balance 20X1 0 0 0 30 000 30 000 0 Movement 0 0 0 3 000 3 000 0 C/ balance 20X1 0 0 0 33 000
33 000 0 Derecognise (1) (33 000) 33 000 Movement 0 0 0 9 000 0 9 000 C/ balance 20X2 0 0 0 42 000
0 42 000 Re-recognise (2) 33 000 (33 000)
Recognise (3) 9 000 (9 000) Movement 0 0 0 12 000 12 000 0 C/ balance 20X3 0 0 0 54 000 54 000 0

(1) Write-down of an asset – derecognising the asset

(2) Write-back of an asset – re-recognising the asset that was derecognised in a prior year
(3) Recognising a deferred tax asset that had never been recognised before

© Service & Kolitz, 2020 Chapter 6: Page 36

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.13 continued …

b) Journal entries

20X3 20X2 20X1

Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)

Deferred tax: income tax (A/L) W2.1 & W2.2 12 000 0 3 000 Income tax expense (E) (12 000) 0 (3
000) Deferred tax adjustment: tax loss increased

Income tax expense (E) W2.2 0 33 000 0 Deferred tax: income tax (A/L) 0 (33 000) 0 Write-down of
prior year DTA caused by tax loss since future
profitability is now in question (only in 20X2)

Deferred tax: income tax (A/L) W2.2 33 000 0 0 Income tax expense (E) (33 000) 0 0 Write back of
previously written down DTA caused by tax loss:
sufficient profitability is now expected such that the tax loss will
be able to be used

Deferred tax: income tax (A/L) W2.2 9 000 0 0 Income tax expense (E) (9 000) 0 0 Prior year DTA
caused by tax loss now recognised for the first
time: sufficient profitability is now expected such that the tax
loss will be able to be used
© Service & Kolitz, 2020 Chapter 6: Page 37
Solutions to GAAP : Graded Questions Deferred taxation
STATEMENTS
FOR THE YEAR
Solution 6.13 ENDED 31
continued …
c) Notes DECEMBER 20X3,

20X2 AND 20X1 15. 20X3 C 20X2 C

STALK LIMITED 20X1 C
NOTES TO THE Income tax expense
FINANCIAL

Current tax 0 0 0 Deferred tax

- Current year movement in temp differences W2.1 (12 000) (9 000) (3 000) - Current year DTA not
recognised W2.2 9 000 0 - Prior year DTA written-down/ (back) W2.2/ Jnl (33 000) 33 000 0 - Prior
year unrecognised DTA now recognised W2.2/ Jnl (9 000) 0 0 Tax expense per statement of
comprehensive income (54 000) 33 000 (3 000)

Tax rate reconciliation

Applicable tax rate 30% 30% 30% Tax effects of:
Profit before tax 20X3: (20 000 loss x 30%) 20X2: (6 000) (3 000) 3 000
(10 000 loss x 30%)
20X1: (10 000 profit x 30%)

Exempt dividend income 20 000 x 30% (each year) (6 000) (6 000) (6 000) Current year deferred
tax asset not recognised: W2.2 0 9 000 0 Prior year DTA written down/(written back): W2.2 (33
000) 33 000 0 Prior year unrecognised DTA now recognised: W2.2 (9 000) 0 0
 Tax expense per the statement of comprehensive income (54 000) 33 000 (3 000)

Effective tax rate 20X3: (54 000 tax income / 20 000 (270%) (333%) (30%)
loss) 20X2: (33 000 expense / 10 000 loss)
20X1: (3 000 tax income / 10 000 profit)

16. Deferred income tax asset

The deferred tax balance comprises tax on the following types of temporary differences: Tax loss 54
000 0 33 000 54 000 0 33 000

Comment:
The 20X2 financial statements would have required the following additional disclosure:

“A deferred tax asset of C42 000 on an unused tax loss of C140 000 at 31 December 20X2 has not been recognised
since taxable economic benefits are not probable in the foreseeable future (20X1: Unrecognised deferred tax assets
were nil).”

© Service & Kolitz, 2020 Chapter 6: Page 38

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.14

a) Calculation of current tax

20X3 20X2 20X1

CCC
Profit before tax 150 000 (30 000) (60 000) Add back depreciation (180 000 / 3 years) 60 000 60 000
60 000 Less capital allowance (180 000 / 2 years) 0 (90 000) (90 000) Tax loss brought forward (150
000) (90 000) 0 Taxable profit/ (tax loss) 60 000 (150 000) (90 000)

Current income tax at 30% 18 000 nil nil

b) Calculation of deferred tax balance

DTA/L balance on TDs due to equipment + - DTA/L balance on TDs due to tax loss =
20X1: -9 000 + 9 000 = 0
20X2: -18 000 + 18 000 = 0
20X3: 0 + 0 = 0

Workings:
W1: Deferred relating equipment
Tax base Temporary Deferred tax at
Carrying amount difference 30%
Balance: 1 Jan 20X1 0 0 0 0 Purchase of asset 180 000 180 000 0 0 Depreciation (60 000) (90 000) 30 000 9
000 Dr TE Cr DT
Balance: 120 000 90 000 30 000 9 000 Liability
31 Dec 20X1

Depreciation (60 000) (90 000) 30 000 9 000 Dr TE Cr DT

Balance: 60 000 0 60 000 18 000 Liability
31 Dec 20X2

Depreciation (60 000) 0 60 000 18 000 Dr DT Cr TE

Balance: 0000
31 Dec 20X3

W2: Deferred tax due to tax loss

Balance: 1 Jan X1 0 0 0 0 Movement 0 90 000 90 000 27 000 Dr DT Cr TE Balance: 31 Dec X1 0 90 000

90 000 27 000 Asset Movement 0 60 000 60 000 18 000 Dr DT Cr TE Balance: 31 Dec X2 0 150 000 150
000 45 000 Asset Movement 0 (150 000) (150 000) (45 000) Dr TE Cr DT Balance: 31 Dec X3 0 0 0 0

© Service & Kolitz, 2020 Chapter 6: Page 39

Solutions to GAAP : Graded Questions Deferred taxation
W1
Tax loss: W2

Solution 6.14 continued ...

W3: Deferred tax summary

Equipment:
Recognised Total Recognised Unrecognised
Balance: 1 Jan 20X1 0 0 0 0 Movement (9 000) 27 000 9 000 18 000 Balance: 31 Dec 20X1 (9 000)
27 000 9 000 18 000 Movement (9 000) 18 000 9 000 9 000 Balance: 31 Dec 20X2 (18 000) 45 000
18 000 27 000 Movement:
- portion of DTA used 18 000 (45 000) (45 000)
- portion of unrecognised DTA now recognised 27 000 (27 000)

Balance: 31 Dec 20X3 0 0 0 0

Comment:
∙ The deferred tax asset relating to the tax loss can only be recognised in the financial statements as
“deferred tax” to the extent of the deferred tax liability arising from the equipment. IAS 12.24 ∙ It is
necessary to keep a record of the portion of the deferred tax asset that is not recognised since this needs
to be disclosed in the deferred tax note.
∙ Be aware that the movement in this unrecognised portion of the deferred tax asset is a reconciling item
for the purposes of the tax rate reconciliation in the tax expense note.

c) Tax-related journal entries

Debit Credit
31 December 20X1
Income tax expense (P/L) W1 9 000 Deferred tax: income tax (A/L) 9 000 Originating: DT adjustment
due to taxable temporary differences on equipment.

Deferred tax: income tax (A/L) W2, W3 9 000 Income tax expense (P/L) 9 000 Originating: Deferred tax
asset recognised for deductible temporary differences relating to the tax loss, limited to the amount of
the deferred tax liability at year end (c/b 27 000 limited to 9 000 - o/b 0)

31 December 20X2
Income tax expense (P/L) W1 9 000 Deferred tax: income tax (A/L) 9 000 Originating: DT adjustment
due to temporary differences: equipment

Deferred tax: income tax (A/L) W2, W3 9 000 Income tax expense (P/L) 9 000 Originating: Deferred tax
asset recognised for deductible temporary differences relating to the tax loss, limited to the amount of
the deferred tax liability at year end (c/b 45 000 limited to 18 000 – o/b 9 000)

© Service & Kolitz, 2020 Chapter 6: Page 40

Solutions to GAAP : Graded Questions Deferred taxation

Solution 6.14 continued …

c) Tax related journal entries continued …

31 December 20X3
Deferred tax: income tax (A/L) W1 18 000 Income tax expense (E) 18 000 Reversal: DT adjustment
due to temporary differences: equipment

Income tax expense (E) W2, W3 45 000 Deferred tax: income tax (A/L) 45 000 Reversal: DT
adjustment due to tax loss being used: the reversal is not
limited

Deferred tax: income tax (A/L) W2, W3 27 000 Income tax expense (E) 27 000 Originating:
Recognition of previously unrecognised deferred tax asset
caused by the tax loss (included in the previous journal relating to the
DTA having been used up)

Income tax expense (E) Part (a) 18 000 Current tax payable: income tax (A/L) 18 000 Current tax
estimated based on current taxable profits (20X3)

d) Financial statement disclosure

GERALD’S GOFERS LIMITED

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X3
Note 20X3 C 20X2 C 20X1 C
Profit/ (loss) before tax 150 000 (30 000) (60 000) Income tax expense 15 (18 000) 0 0 Profit/ (loss) for
the year 132 000 (30 000) (60 000) Other comprehensive income for the year 0 0 0 Total comprehensive
income/ (loss) for the year 132 000 (30 000) (60 000)
GERALD’S GOFERS LIMITED
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X3
20X1 ASSETS / LIABILITIES Note 20X3 C
C Non-current assets/ liabilities 20X2 C

Deferred tax W3 5 0 0 0

© Service & Kolitz, 2020 Chapter 6: Page 41

Solutions to GAAP : Graded Questions Deferred taxation
NOTES TO THE
FINANCIAL
Solution 6.14 STATEMENTS FOR
continued . . . THE YEAR ENDED
31 DECEMBER 20X3
d) Financial
5. Deferred tax asset/
statement disclosure (liability)
continued ... 20X3 C 20X2 C
The deferred tax balance 20X1 C
comprises tax on the
GERALD’S GOFERS following types of
LIMITED temporary differences:

Property, plant and equipment (W1/W3) 0 (18 000) (9 000) Tax loss (W3) 0 18 000 9 000 0 0 0

Comment:

The 20X2 financial statements would have required the following additional disclosure:

“A deferred tax asset of C27 000 relating to an unused tax loss of C90 000 was not recognised at year
end since future taxable profits are not expected in the foreseeable future (20X1: the unrecognised
deferred tax asset was C18 000 on an unused tax loss of C60 000). These unused tax losses have no
expiry dates.”

GERALD’S GOFERS LIMITED

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X3
20X1 15. Income tax expense 20X2 C
C 20X3 C

Current 18 000 0 0 Deferred

Current year movement in temporary differences W1&2 27 000 (9 000) (18 000)

Current year DTA not recognised W3 0 9 000 18 000

Prior year unrecognised DTA now recognised
 W3/jnls (27 000) 0 0 18 000 0 0
Tax rate reconciliation
Applicable tax rate 30% 30% 30% Tax effects of:
Profit/ (Loss) before tax 20X3: (150 000 x 30%) (9 000)
20X2: (30 000 loss x 30%) (18 000)
20X1: (60 000 loss x 30%)
45 000
Current year DTA not recognised: tax loss W3 0 9 000 18 000 Prior year DTA now recognised: tax
loss W3 / jnls (27 000) 0 0 Tax expense 18 000 0 0

Effective tax rate 20X3: (18 000 / 150 000)

20X2 & 20X1: (0 / loss)12% N/A N/A

© Service & Kolitz, 2020 Chapter 6: Page 42