1 2

Fine paid on late payment of 20X7 tax assessment 5 000

RESPONSIBLE REPORTING 300 DEPARTMENT The accountant has prepared the following deferred tax calculation on 31 December 20X8
(assume that it is correct):
IAS 12: INCOME TAXES OF Carrying Tax Temporary Deferred tax
Additional question (not part of prescribed material)
ACCOUNTING amount base difference (25%)
(dr)/cr
HC Verster
UP R R R R
Factory building
Balance 31/12/20X8 1 905 000 1 875 000 30 000 7 500
Additional question (33½ marks) Balance 1/1/20X8 2 080 000 2 000 000
Depreciation/Tax
[current tax calculation; deferred tax calculation; income tax expense note; change in tax allowance 20X8 (175 000) (125 000)
rate]
Factory plant
LITTLE GIRL LIMITED manufactures food products using organically grown raw materials. Balance 31/12/20X8 760 000 650 000 110 000 27 500
The company also does extensive research on the use of colourants and preservatives in Balance 1/1/20X8 950 000 805 000
food products. The company is listed on the JSE Limited under the manufacturing sector. Depreciation/Tax
Little Girl Limited’s financial year ends on 31 December. allowance 20X8 (190 000) (155 000)

On 31 December 20X7, the company had a credit balance on its deferred tax account of Office building
R21 750 which had been calculated at a corporate tax rate of 30%. During the year ended Balance 31/12/20X8 930 000 1 300 000 (370 000) Exempt
31 December 20X8, the corporate tax rate changed to 25% effective for years of Balance 1/1/20X8 1 080 000 1 300 000
assessment ended on or after 1 April 20X8. Little Girl Limited recognises changes in the Depreciation/Tax
deferred tax balance attributable to changes in tax rates by re-measuring the deferred tax allowance 20X8 (150 000) -
balance at the beginning of the year.
Trade debtors 430 000 430 000 - -
During the year ended 31 December 20X8, Little Girl Limited earned royalty income from a
foreign party amounting to R34 300. The actual amount deposited in the company’s bank Allowance for expected
account amounted to R30 000 after the deduction of a withholding tax. In terms of a double credit losses 255 000 63 750 (191 250) (47 813)
taxation agreement, no South African income tax is payable on this amount.
Research expenses - 240 000 (240 000) (60 000)
Little Girl Limited recognised a net current tax liability on 31 December 20X7 of R354 000 Incurred 20X8 320 000 320 000
based on the taxable profit for the year. When the assessment was received from the South Expensed/Tax allowance
African Revenue Service during the year ended 31 December 20X8, the assessment 20X8 (320 000) (80 000)
reflected an amount owing of only R345 000.
Long-term borrowing 290 000 290 000 - -
In the calculation of the accounting profit before tax of R813 200 from South African sources
for the year ended 31 December 20X8, the following items, inter alia, had been taken into Interest expense
account: accrual on long-term
R loan 15 000 15 000 - -
dr/(cr)
Adjustment for allowance for expected credit losses 25 000 Prepaid expenses 145 000 130 000 15 000 3 750
(South African Revenue Service gives a deduction of 25% of this
amount. Bad debts are recognised immediately in profit/loss Income received in
when they occur and are not off-set against the allowance for advance (12 000) - (12 000) (3 000)
expected credit losses account balance.)
Dividend income received in cash (7 500) (72 063)
Profit on sale of delivery vehicle (20 000) There were no prepaid expenses or income received in advance on 31 December 20X7.
(Vehicle was sold on 1 January 20X8 for R200 000. Original cost
of vehicle was R185 000. Tax base of asset on date of sale was On 31 December 20X8, there are tax planning opportunities that will produce taxable
R160 000.) income in the future for the utilisation of any deferred tax assets.
 3 4
Little Girl Limited uses the Rand value format for the reconciliation between the income tax Foreign tax ^ (4 275)
expense and accounting profit before tax (if required). (R34 300 ^ x 25%^ = R8 575 – R4 300^m/t)
Effect of tax rate change on opening credit balance of
REQUIRED: deferred tax ^ (above) ^m/t (3 625)
Total income tax expense ^ same as above 231 100
Prepare the “Income tax expense” note for Little Girl Limited for the year ended
31 December 20X8 in accordance with IAS 12, Income Taxes. The standard tax rate is the rate announced by the South African tax authority. 
(a) R825 200 RSA sources ^ + R34 300 foreign ^ (given) = R859 500 (1  above)
Note:  Comparative information is not required.
 Round calculated Rand amounts to the nearest Rand. (b) R34 300 ^ x 25%^ = R8 575 – R4 300^m/t = R4 275 (1½  above)
 Round calculated percentages to two decimal places.

SUGGESTED SOLUTION – Additional question (33½ marks)

Little Girl Limited

Notes for the year ended 31 December 20X8 (-½ mark if incomplete)

10. Income tax expense

Main components of income tax expense: R

Current ^
(13)
- current ^ (calc 1) 329 613
- over provision prior year ^ (9 000)
(R354 000 ^ – R345 000^ ) given
Deferred ^
- arising on the origination and reversal of temporary
(1½)
differences ^ (calc 3) (90 188)
(1½)
- tax rate change adjustment ^ (calc 3) (3 625)
Foreign tax ^ (R34 300 ^ – R30 000^) given 4 300
Total income tax expense 231 100

During the year, the tax authority changed the tax rate from 30% to 25%.

Reconciliation between the income tax expense and accounting profit before tax
R
Accounting profit before tax ^ 847 500
(R813 200 RSA sources ^ + R34 300 foreign ^) (given)

Tax at standard rate of 25% ^ 211 875

(R847 500 x 25%) ^m/t
Tax effect of non-taxable income:
Dividend income ^ (1 875)
(R7 500 x 25%) ^m/t
Non-taxable portion of capital profit on sale of vehicle ^ (750)
[(R15 000 – R12 000) x 25%) ^m/t
Tax effect of non-deductible expenses:
Fines ^ 1 250
(R5 000 x 25%) ^m/t
Depreciation on commercial building ^ 37 500
(R150 000 x 25%) ^m/t
Over-provision of current tax in prior period ^ (above) ^m/t (9 000)
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Calculations: 2. Delivery vehicle sold

1. Current tax R
R Proceeds on sale (given) ^200 000
Accounting profit before tax (given) 813 200 Original cost of asset (given) ^185 000
Non-deductible expenses Capital profit (non-temporary difference) ^m/t* 15 000
Fines (late payment of tax assessment) (given) ^ 5 000 (1 calc 1)
Depreciation of commercial building (given) ^ 150 000 Total profit on sale for accounting (given) ^*20 000
Non-taxable income Revenue profit for accounting (temporary difference) 5 000
Dividend income (given) ^ (7 500) [or: CA = 200 000 – 20 000 profit = 180 000 CA (1*  calc 1)
(1)
Eliminate total capital profit on sale of delivery vehicle (15 000) 185 000 cost – 180 000 CA = 5 000 non-capital profit]
(R15 000 calc 2)
Include taxable capital profit on sale of delivery vehicle 12 000 Tax base of asset on date sold (given) ^160 000
(R15 000 calc 2 x 80%) ^ Proceeds on sale (given) ^200 000
Temporary differences Gain on de-recognition 40 000
(1)
Eliminate non-capital profit on sale of vehicle (5 000) Capital profit (as above) (non-temporary difference) ^m/t (15 000)
(calc 2) [accounting] Thus, recoupment for tax (temporary difference) 25 000
(1½)
Include recoupment on delivery vehicle sold (calc 2) [tax] 25 000 OR: R185 000 CP  – R160 000 TB ^ = R25 000 (1½ calc 1)
Factory building – depreciation [accounting] (given) ^ 175 000
Factory building - building allowance [tax] (125 000) 3. Deferred tax
(R2,5 million x 5%)^
Factory plant – depreciation [accounting] (given) ^ 190 000 R
Factory plant – wear and tear [tax] (given) ^ (155 000) Balance 31/12/20X7 (given) ^ ** 21 750 Cr
Research expenses [accounting] (given) ^ 320 000 Change in tax rate (R21 750^ x 5%^/30%^) ^m/t **(3 625) Dr
Research expenses [tax] (R320 000 x 25%) ^ (80 000) [1½  note]
Allowance for expected credit losses adjustment [accounting] ^ 25 000
Balance after effect of change in tax rate 18 125 Cr
(given)
or (R21 750^ x 25%^/30%^)
Allowance for expected credit losses [tax] (6 250)
Balance 31/12/20X8 (given) ^ ** (72 063) Dr
or: R25 000  x 25% ^ = (R6 250)
Allowance 31/12/20X7 [tax] 57 500
Thus movement in deferred tax recognised in P/L (90 188) Dr
([R255 000 – R25 000] ^ x 25% ^)
[1½ ** note]
Allowance 31/12/20X8 [tax] (63 750)
(R255 000 x 25%) ^
Prepaid expenses (given in DT calc provided)  (15 000)
Income received in advance (given in DT calc provided)  12 000

Taxable profit 1 318 450

Current tax (R1 318 450 x 25% ^) 329 613
(13 note 10)