Prepare Current And Deferred Tax Calculations For Carlton Lt

Prepare current and deferred tax calculations for Carlton Ltd

Draft income statement for the year ended 30 June 2014

Draft income statement for the year ended 30 June 2014 Revenue 10,000,000 Cost of sales -4,000,000 Gross profit 6,000,000 Other income Royalty income 243,000 Profit on sale of motor vehicle 68,000 Grant income 143,000 Expenses Depreciation - motor vehicles 315,000 Depreciation - Plant & equipment 172,000 Entertaining 18,650 Annual leave 152,000 Repairs 255,000 Bad and doubtful debts 203,000 Rent 264,000 Other expenses 3,000,379,650 Profit before tax for the year 2,074,350 Extracts from the draft statement of financial position as at 30 June Assets Cash 803,000 Accounts receivable 2,500,000 Less provision for doubtful debts 143,000 Inventory 2,600,000 Prepayments (rent) 34,750 Royalty income due 22,950 Deferred tax asset ? ? Motor vehicles 1,098,000 Plant & Equipment 1,033,110 Goodwill 370,500 Liabilities Accounts payable 1,980,000 Accrued annual leave 43,000 Provision for repairs 100,000 Bank loan 3,500,000 Current tax payable ? ? Deferred tax liability ? ?

Paper For Above instruction

This assignment requires the preparation of current and deferred tax calculations and journal entries for Carlton Ltd based on the draft financial statements, following the guidelines of AASB 112 “Income Taxes”. The tasks involve calculating current tax liabilities, justifying the treatment of specific income and expenses, and determining deferred tax assets and liabilities as at the end of two reporting years. Additionally, an evaluation of whether these deferred taxes meet the recognition criteria outlined in the conceptual framework is required.

Current Tax Calculation and Journal Entry

To prepare the current tax work sheet, we first need to compute taxable income based on the draft profit before tax, adjusting for temporary and permanent differences as outlined in AASB 112. The statutory tax rate is 30%. The draft profit before tax is $2,074,350. We shall adjust this figure for items such as tax-exempt income, non-deductible expenses, and timing differences.

Royalty income of $243,000 and grant income of $143,000 are partially or fully exempt from tax; thus, these need adjustments. Grant income is explicitly exempt from tax, so it is subtracted from accounting profit when computing taxable income. Royalty income, depending on local tax law, may be taxable or exempt; assuming it is taxable unless specified otherwise, but the problem states grant income is exempt and makes no mention of royalties being exempt, so we assume royalty income is taxable.

Entertaining expenses, totalling $18,650, are not allowable deductions for tax purposes, so an addition is necessary to account for disallowed expenses. Depreciation for accounting purposes ($315,000 motor vehicles, $172,000 plant & equipment) differs from tax depreciation (which is $400,000 for motor vehicles and $200,000 for plant & equipment). These differences will generate temporary differences.

Provision for doubtful debts of $143,000 impacts the accounts, but only the difference between the provision's tax and accounting bases results in temporary differences.

Let's proceed step-by-step to compute taxable income, establish the current tax liability, and then prepare the journal entries.

1. Starting with profit before tax: $2,074,350.

2. Adjustments:

• Subtract exempt income (grant income): $143,000
• Add non-allowable entertainment expenses: $18,650
• Adjust for temporary differences in depreciation:
• Accounting depreciation: motor vehicles $315,000; tax depreciation $400,000; difference: $85,000 (tax higher than accounting, leading to a temporary deductible difference).
• Accounting depreciation: plant & equipment $172,000; tax depreciation $200,000; difference: $28,000 (tax higher, deductible temporarily).
• Adjust for Doubtful Debts Provision: The provision for doubtful debts of $143,000 impacts the total receivables; tax bases zero unless specified. The difference may create temporary differences if the provision is deductible for tax.

3. Including other adjustments as necessary, the taxable income calculation is as follows:

Profit before tax: $2,074,350
Less: Grant income (exempt): $143,000
Add: Entertainment expense (non-allowable): $18,650
Adjust for depreciation difference: ($85,000 + $28,000) = $113,000
Adjust for doubtful debts provision: $143,000 (assumed deductible for tax purposes)

Calculating taxable income:

Taxable income = 2,074,350 - 143,000 + 18,650 + 113,000 + 143,000 = $2,206,000

4. Computing current tax liability:

Current tax = Taxable income x tax rate = $2,206,000 x 30% = $661,800

5. Journal entry to record current tax:

Debit Income Tax Expense $661,800
Credit Income Tax Payable $661,800

Justification of Treatment of Entertainment Expense and Exempt Income

Entertainment expenses amounting to $18,650 are recognized as expenses in the financial statements but are not allowable deductions for tax purposes under tax law. The Australian tax legislation disallows entertainment expenses, making them non-deductible. Accordingly, in the current tax work sheet, these expenses must be added back to accounting profit to arrive at taxable income, ensuring compliance with tax regulations. This adjustment recognizes the permanent difference arising due to tax law disallowance.

Grant income of $143,000 is explicitly exempt from tax, as stated in the problem. Since it does not form part of assessable income for tax purposes, it must be deducted from accounting profit in calculating taxable income. This treatment reflects the permanent difference, as the income is taxed differently for accounting and tax purposes.

Deferred Tax Worksheet and Journal Entry

Deferred tax arises from temporary differences between the carrying amounts of assets and liabilities in the financial statements and their tax bases. For calculations at 30 June 2013 and 30 June 2014, we examine the relevant assets and liabilities, their carrying amounts, tax bases, and temporary differences.

Calculations for 30 June 2014:

• Motor Vehicles: CA = $1,098,000; tax base = $1,600,000 (start) adjusted for tax depreciation ($400,000). With current depreciation, the tax base becomes $1,200,000, so the tax base for 2014: $1,600,000 - $400,000 = $1,200,000.
• Difference: CA - TB = $1,098,000 - $1,200,000 = -$102,000, indicating a deductible temporary difference.
• Plant & Equipment: CA = $1,033,110; tax base: $1,060,000 - $200,000 depreciation = $860,000; difference: $1,033,110 - $860,000 = $173,110 (taxable temporary difference).

Deferred tax asset and liability are calculated as differences multiplied by the tax rate (30%):

• Deferred Tax Asset (DTA): $102,000 x 30% = $30,600
• Deferred Tax Liability (DTL): $173,110 x 30% = $51,933

The journal entries to recognize deferred tax are:

Debit Deferred Tax Asset $30,600
Credit Deferred Tax Benefit (Income Tax Expense) $30,600
Debit Deferred Tax Expense $51,933
Credit Deferred Tax Liability $51,933

Evaluation of Deferred Tax Assets and Liabilities

According to the conceptual framework, deferred tax assets and liabilities are recognized only when it is probable that future taxable profits will be available against which the temporary differences can be utilized or settled (IAS 12). In this context, the deferred tax asset arising from deductible temporary differences, such as the motor vehicle tax base, relies on the expectation of sufficient taxable income. Similarly, the deferred tax liability related to plant & equipment is recognized because the temporary taxable difference indicates an obligation to pay income tax in future periods.

However, the recognition of deferred tax assets should consider the probability of future taxable income, especially where taxable temporary differences or unused tax losses exist. If future taxable income projections are insufficient, the deferred tax asset may need to be recognized only to the extent that it is probable that taxable profits will be available.

In this specific case, given the profit before tax and other income, it is probable that deferred tax assets related to deductible temporary differences will be recoverable, satisfying the recognition criteria. Similarly, deferred tax liabilities are recognized because they reflect obligations arising from temporary differences between accounting and tax bases of assets.

Conclusion

This comprehensive analysis demonstrates the importance of correctly calculating current and deferred tax liabilities, respecting permanent and temporary differences, and adhering to accounting standards. Proper recognition and quantification of these elements ensure compliance with AASB 112 and provide transparent financial statements that accurately reflect tax obligations and benefits.

References

• Australian Accounting Standards Board (AASB) (2023). AASB 112 "Income Taxes".
• International Accounting Standards Board (IASB) (2023). IAS 12 "Income Taxes".
• Barth, M. E. (2010). "Financial accounting and reporting in the age of IASB and FASB harmonization." Journal of Accounting and Economics, 50(2-3), 204-226.
• Financial Accounting Standards Board (FASB). (2021). Accounting Standards Codification (ASC) Topic 740 "Income Taxes".
• Schwartz, R. (2014). "Deferred Taxes and Business Valuation." Business Valuation Review, 33(2), 84–96.
• De Zegel, V., & Perry, L. (2018). "Tax Accounting and Financial Reporting." Journal of Contemporary Accounting & Economics, 14(3), 269-282.
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