Question

Jaguar Ltd purchased a machine on 1 July 2016 at the cost of $640,000. The machine is expected to have a useful life of 5 years (straight-line basis) and no residual value. For taxation purposes, the ATO allows the company to depreciate the asset over 4 years.
The profit before tax for the company for the year ending 30 June 2017 is $600,000. To calculate this profit the company has deducted $60,000 entertainment expense, and $80,000 salary expense that has not yet been paid. Also the company has included $70,000 interest as income that the company has not yet received. The tax rate is 30%.
Required:
(a) Calculate the company’s taxable profit and hence its tax payable for 2017. (2 marks)
(b) Determine the deferred tax liability and/or deferred tax asset that will result. (2 marks)
(c) Prepare the necessary journal entries on 30 June 2017. (3 marks)

Answer 1

Answer:

Jaguar Ltd

Profit before tax =                          $600,000

Add non-allowed expenses for 2017:

Entertainment expense  $60,000

Unpaid salary expense   $80,000  140,000

Less

Depreciation (difference) 32,000

Unreceived interest         70,000    102,000

a) Adjusted taxable profit             $638,000

a) Tax Payable 30% * $638,000      191,400

b) Computation of Deferred tax liability:

Depreciation             $32,000

Unreceived interest $70,000

Total                        $102,000

30% * $102,000

= $30,600

Computation of Deferred tax asset:

Unpaid salary expense   $80,000

30% * $80,000

= $24,000

c) Journal entries on 30 June 2017:

Debit Income Tax Expense $191,400

Credit Income Tax Payable $191,400

To record the tax expense for the year.

Debit Deferred Tax Asset $24,000

Credit Income Tax Expense $24,000

To create deferred tax asset on deductible expense.

Debit Income Tax Expense $30,600

Credit Deferred Tax Liability $30,600

To create deferred tax liability on deferred income.

Explanation:

a) Data and Calculations:

July 1 2016 Equipment purchased = $640,000

Useful life = 5 years

Depreciation basis = straight-line

Depreciable amount = $640,000/5 = $128,000

ATO Useful life = 4 years

Depreciable amount under ATO = $640,000/4 = $160,000

Profit before tax =                          $600,000

Add non-allowed expenses for 2017:

Entertainment expense  $60,000

Unpaid salary expense   $80,000  140,000

Less

Depreciation (difference) 32,000

Unreceived interest         70,000    102,000

a) Adjusted taxable profit             $638,000

a) Tax Payable 30% * $638,000      191,400

b) Computation of Deferred tax liability:

Temporary Differences:

Depreciation             $32,000

Unreceived interest $70,000

Total                        $102,000

30% * $102,000

= $30,600

Computation of Deferred tax asset:

Deductible expense:

Unpaid salary expense   $80,000

30% * $80,000

= $24,000

Deferred Tax Liability and Deferred Tax Asset arise from temporary timing differences between the generally accepted accounting principles based taxable profit and the tax act based taxable profit.  An example, is the unpaid salary expense that is not allowed by tax law because it has not been paid for.  When it is eventually paid, the expense becomes deductible.  While the tax authorities will charge more tax as a result, the company will create a deferred tax asset for this non-allowed expense.