Accounting for Income Taxes代寫

qACCG224 – Semester 1, 2013
Week 3
 
qAccounting for Income Taxes
qLearning objectives
1.Identify differences between pre-tax accounting profit and taxable profit.
2.Describe a temporary difference that results in future taxable amounts.
3.Describe a temporary difference that results in future deductible amounts.
4.Explain the purpose of a reporting date review of deferred tax assets.
5.Describe the presentation of income tax expense in the income statement.
6.Describe various temporary and permanent differences.
7.Explain the effect of various tax rates and tax rate changes on deferred income taxes.
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qFundamentals of accounting for income taxes
qPre-tax accounting profit is
Ødetermined according to accounting standards and principles;
Ømeasured with objective of providing useful information to investors and creditors;
Ødetermined under accrual basis accounting.
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qFundamentals of accounting for income taxes (cont’d)
qTaxable profit is determined
Øaccording to Australian tax legislation;
Øprincipally, under cash basis accounting.
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qAccounting income vs tax treatments
qAccounting income vs tax treatments (cont’d)
qWorked Example – Calculating taxable profit and accounting profit
qYou are provided with the following information from the accounts of Big Kahuna Ltd for the year ending 30 June 2012. You are to calculate accounting profit and taxable profit.
ØCash sales   $100 000
ØCost of goods sold   $40 000
ØAmounts received in advance for services
to be performed in August 2012   $5 000
ØRent expense for year ended 30 June 2012   $10 000
ØRent prepaid for two months to 31 August 2012   $1 000
ØDoubtful debts expenses   $1 000
ØAmount provided in 2012 for employees’
long-service leave entitlements   $3 000
qWorked Example – Calculating taxable profit and accounting profit (cont’d)
  Accounting   Taxable
  profit   profit
ØCash sales   $100 000   $100 000
ØCost of goods sold   ($40 000)   (40 000)
ØAmounts received in advance by Big Kahuna Ltd
for services to be performed in August 2012   
ØRent expense for year ended 30 June 2012  
ØRent prepaid for two months to 31 August 2012)
ØDoubtful debts costs  
ØAmount earned in 2012 for employees’
long-service leave entitlements  
ØTotal 
qTwo types of differences
qThe differences between accounting and taxable profit we discussed so far are all of a temporary nature:
Øtemporary differences reverse over time, i.e. they will increase or decrease taxable income in the future;
Øtherefore, they give rise to deferred taxes;
Øtaxable amounts increase taxable income in future years:
­a deferred tax liability is recognised;
Ødeductible amounts decrease taxable income in future years:
­a deferred tax asset is recognised.
qTwo types of differences (cont’d)
qSome other differences are permanent:
Øe.g. entertainment expense must be recognised for accounting purposes, however, is not deductible for tax purposes;
Øthey will not reverse over time;
Øtherefore, they do not give rise to deferred taxes;
Ømore examples and treatment of permanent differences later.
qBalance sheet approach to accounting for taxation
qAccounting for income taxes:
Øgoverned by AASB 112;
Øapplies the ‘balance sheet’ method:
­this means the recognition of deferred tax assets and liabilities is based on the differences between accounting and tax values of assets and liabilities;
Øfocuses on comparing the carrying value of an entity’s assets and liabilities (determined by accounting rules) with the tax base for those assets and liabilities:
­effectively involves comparing  the balance sheet derived using accounting rules with the balance sheet that would be derived from taxation rules.
qBalance sheet approach to accounting for taxation (cont’d)
qCarrying amount vs tax base of asset or liability
ØCarrying amount is the amount the asset or liability is recorded at in the accounting records;
ØTax base is defined as the amount that is attributed to an asset or liability for tax purposes (AASB 112):
­tax base represents the amount an asset or liability would be recorded at if the balance sheet (statement of financial position) were prepared applying taxation rules;
ØWhere the carrying amount of an asset or liability is different from the tax base a ‘temporary difference’ can arise.
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qCalculating the tax base
Calculating the tax base for an asset
CA
– future taxable amounts
+ future deductible amounts
= TB
Calculating the tax base for a liability
CA
+ future taxable amounts
- future deductible amounts
= TB
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qCalculating the tax base (cont’d)
qBalance sheet approach to accounting for taxation (cont’d)
qTaxable temporary difference → deferred tax liability:
Øthe carrying amount of the asset exceeds the tax base;
Øtaxation payments have effectively been deferred to future periods;
Øtax is reduced or ‘saved’ in early years, but additional tax will need to be paid later.
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qBalance sheet approach to accounting for taxation (cont’d)
qExample of a deferred tax liability:
ØCarrying amount of a non-current depreciable asset exceeds the tax base in early years, as depreciation allowable as a deduction for tax purposes is greater than depreciation for accounting purposes;
Øthis will be reversed in later years when no depreciation is allowable for tax purposes.
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qBalance sheet approach to accounting for taxation (cont’d)
qDeductible temporary difference → deferred tax asset
ØThe carrying amount of an asset is less than the tax base;
Øtaxation payments have been made ‘in advance’;
Øtax is reduced or ‘saved’ in later years.
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qBalance sheet approach to accounting for taxation (cont’d)
qExample of a deferred tax asset:
ØTax base of a depreciable asset exceeds the carrying amount in early years, as depreciation allowable as a deduction for tax purposes is less than depreciation for accounting purposes;
Øthis will be reversed in later years when the asset is fully depreciated for accounting purposes, but depreciation is still allowable as a deduction for tax purposes.
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qBalance sheet approach to accounting for taxation (cont.)
qCalculation of income tax payable:
ØIncome tax payable is based on taxable income, not accounting profit;
Ønecessary to make adjustments to accounting profit to determine tax profit, e.g.:
­add back accounting depreciation;
­deduct depreciation for taxation purposes;
Øcalculation of income tax payable:
­tax rate multiplied by tax profit.
qWorked Example – Temporary  differences caused by the depreciation of a non-current asset
qRobert August Ltd commences operations on 1 July 2009.
qOn the same date, it purchases a fibreglassing machine at a cost of $600 000.
qThe machine is expected to have a useful life of four years, with benefits being uniform throughout its life. It will have no residual value at the end of four years.
qHence, for accounting purposes the depreciation expense would be $150 000 per year  (600 000/4 years).
qFor taxation purposes, the ATO allows the company to depreciate the asset over three years – that is $200 000 per year.
qThe profit before tax of the company for each of the next four years (for years ending 30 June) is $500 000, $600 000, $700 000 and $800 000 respectively.
qThe tax rate is 30%.
qWorked Example – Solution
qYear 1 (ending 30 June 2010)
  Carrying   Temporary
  value   Tax base   difference
  ($)   ($)   ($)
Fibre glassing machine: cost  600 000  600 000
Accumulated depreciation
qWorked Example – Solution (cont’d)
The tax on the taxable income would be determined as follows:
Accounting profit before tax   $500 000
Add back accounting depreciation  
Subtract depreciation for taxation purposes  
Taxable profit  
Tax at 30%  

The journal entries at 30 June 2010 would be:
Dr   Income tax expense  
Cr   Deferred tax liability  
Dr   Income tax expense  
Cr   Income tax payable  
qWorked Example – Solution (cont’d)
qYear 2 (ending 30 June 2011)
  Carrying   Temporary
  value   Tax base   difference
  ($)   ($)   ($)
Fibre glassing machine: cost  600 000  600 000
Accumulated depreciation  300 000  400 000 
  300 000  200 000  100 000

ØThe temporary difference at 30 June 2011 totals $100 000. Applying the tax rate of 30% provides a deferred tax liability of $30 000.
ØBecause $15 000 has already been recognised in 2010, an increase (or ‘top up’) of $15 000 is required.

qWorked Example – Solution (cont’d)
The tax on the taxable income would be determined as follows:
Accounting profit before tax   $600 000
Add back accounting depreciation   $150 000
Subtract depreciation for taxation purposes   ($200 000)
Taxable profit   $550 000
Tax at 30%   $165 000

The journal entries at 30 June 2011 would be:
Dr   Income tax expense   15 000
Cr   Deferred tax liability   15 000
Dr   Income tax expense   165 000
Cr   Income tax payable   165 000
qWorked Example – Solution (cont’d)
qYear 3 (ending 30 June 2012)
  Carrying   Temporary
  value   Tax base   difference
  ($)   ($)   ($)
Fibre glassing machine: cost  600 000  600 000
Accumulated depreciation  450 000  600 000 
  150 000  0  150 000

ØThe temporary difference at 30 June 2012 totals $150 000. Applying the tax rate of 30% provides a deferred tax liability of $45 000.
ØBecause $30 000 has already been recognised in 2010 and 2011, an increase (or ‘top up’) of $15 000 is required.

qWorked Example – Solution (cont’d)
The tax on the taxable income would be determined as follows:
Accounting profit before tax   $700 000
Add back accounting depreciation   $150 000
Subtract depreciation for taxation purposes   ($200 000)
Taxable profit   $650 000
Tax at 30%   $195 000

The journal entries at 30 June 2012 would be:
Dr   Income tax expense   15 000
Cr   Deferred tax liability   15 000
Dr   Income tax expense   195 000
Cr   Income tax payable   195 000
qWorked Example – Solution (cont’d)
qYear 4 (ending 30 June 2013)
  Carrying   Temporary
  value   Tax base   difference
  ($)   ($)   ($)
Fibre glassing machine: cost  600 000  600 000
Accumulated depreciation 
 

ØThe temporary difference at 30 June 2013 is          , which means that there should be no deferred tax liability or deferred tax asset recorded in relation to this asset.
ØThis means the balance accrued in the deferred tax liability must be reversed in 2013.

qWorked Example – Solution (cont’d)
The tax on the taxable income would be determined as follows:
Accounting profit before tax   $800 000
Add back accounting depreciation   $150 000
Subtract depreciation for taxation purposes                   0
Taxable profit   $950 000
Tax at 30%   $285 000

The journal entries at 30 June 2013 would be:
Dr   Deferred tax liability  
Cr   Income tax expense  
Dr   Income tax expense  
Cr   Income tax payable  
qWorked Example – Solution  (cont’d)
qA review of the Worked Example indicates that the balance sheet approach to accounting for income tax ‘smoothes’ the tax expenses across the four years, as indicated below:
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  Year 1  Year 2  Year 3  Year 4  Total
  ($)  ($)  ($)  ($)  ($)
Tax expense based
on taxable profit  135 000  165 000  195 000  285 000  780 000
Adjustment for
‘temporary’ difference  15 000  15 000  15 000  (45 000)  –
Total tax expense  150 000  180 000  210 000  240 000  780 000
qWorked Example – Current tax liability
Additional information:
q$60 allowed as a tax deduction for plant.
qInterest has not yet been received.
qBad debts of $20 were written off during the year.
qPayments of $30 were made to employees in relation to annual leave taken during the year.
qThe tax rate is 30%
Required:
qCalculate the current tax liability of ABC Ltd for 2012.
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qWorked Example – Solution
qIncome statement presentation
qAn increase in a deferred tax liability is added to tax payable
qAn increase in a deferred tax asset is subtracted from tax payable
qFormula to calculate income tax expense (benefit):
qIncome statement presentation
qIncome statement presentation of income tax expense:
CHELSEA LTD
Statement of Comprehensive Income
for the year ending 30 June 2008

Revenues  $130 000
Expenses     60 000
Profit before income tax  70 000
Income tax expense         21 000
Profit for the period  $  49 000
qsee textbook for details.
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qPermanent differences
qThese are caused by items that:
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ØEnter into pre-tax accounting profit but never into taxable profit, or
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Øenter into taxable profit but never into pre-tax accounting profit.
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qPermanent differences (cont’d)
qSince permanent differences affect only period in which they occur, they do not give rise to future taxable or deductible amounts.
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qDetails of permanent differences must be disclosed in a note.
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qPermanent differences (cont’d)
qItems recognised for financial reporting purposes but not for tax purposes:
ØGoodwill impairment expense
ØNon-taxable (exempt) revenue
ØEntertainment expense
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qItems recognised for tax purposes but not for financial reporting purposes
ØResearch and development allowance (currently 125% of eligible expenditure is deductible)
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Examples of permanent differences
qExample – Permanent and temporary differences, one rate
The accounting records of Anderson Ltd show the following data for the financial year ended 30 June 2012.
1.Equipment was acquired in early July 2011 for $200 000. Straight-line depreciation over a 5-year life is used, with no residual value. For tax purposes, Anderson used a 30% rate to calculate depreciation.
2.Exempt revenue totalled $4000.
3.Product warranties were estimated to be $60 000. Actual repair and labour costs relating to the warranties in the financial year ended 30 June 2012 were $10 000. The remainder is estimated to be incurred evenly in the 2013 and 2014 financial years.
4.Sales on an accrual basis were $100 000. For tax purposes, $75 000 was recorded using the instalment method.
5.Entertainment expenses paid were $4200.
6.Pre-tax accounting profit was $850 000. The tax rate is 30%.
Required: (a)  Prepare a schedule starting with pre-tax accounting profit and ending with taxable profit.
(b)  Prepare the journal entry for 30 June 2012 income tax payable and expense.
qExample – Solution
 
a)   Schedule Pre-tax Accounting profit and Taxable Income for 2012
 
Pre-tax accounting profit  $850 000
Permanent differences


Adjusted accounting profit 
 
Temporary differences



Taxable profit                                      
× 30% = Income Taxes Payable 
 

qExample – Solution (cont’d)
 
b) Journal entry for 30 June 2012

DR  Income Tax Expense 
DR  Deferred Tax Asset     
CR  Deferred Tax Liability 
CR  Income Taxes Payable 

qTax rate considerations
qIf tax rates are different in future years, the enacted tax rate expected to apply should be used
qWhen different tax rates apply to different levels of taxable income, companies are required to use average tax rates expected to apply in periods in which temporary differences reverse
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qTax rate considerations (cont’d)
qWhen a change in tax rate is enacted, its effect should be recorded immediately.
qThe effect is reported as an adjustment to tax expense in the period of change.
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qFinancial statement presentation
qStatement of Financial Position
ØDeferred tax accounts reported as assets and liabilities
ØOffset and presented as net amount only if entity
­has legal right of set-off, and
­intends to settle asset and liability simultaneously or on a net basis.
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qFinancial statement presentation (cont’d)
qSteps in process of classifying deferred taxes on balance sheet
1.Classify amount as current or non-current;
2.Determine net current amount by adding various tax assets and liabilities classified as current:
­if net result is an asset, report as current asset;
­if net result is a liability, report as current liability.
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qFinancial statement presentation (cont’d)
ØDetermine non-current amount by adding various deferred tax assets and liabilities classified as non-current:
­if net result is an asset, report as non-current asset;
­if net result is a liability, report as non-current liability.
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qFinancial statement presentation (cont’d)
qIncome tax disclosures (Notes):
ØCurrent tax expense or benefit;
ØAdjustments from prior periods;
ØDeferred tax expense or benefit relating to temporary differences;
ØAdjustments of deferred tax expense or benefit relating to changes in rates;
ØDeferred tax expense from write-down;
ØCurrent tax expense relating to changes in accounting policies or errors.
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qFinancial statement presentation (cont’d)
qReasons for disclosures relating to income tax include:
ØAssessing quality of earnings;
ØMaking better predictions of future cash flows;
ØPredicting future cash flows from tax loss carry-forwards.
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qIn your study and tute preparation ask yourselves – Can I
qIdentify differences between pre-tax accounting profit and taxable profit?
qDescribe a temporary difference that results in future taxable amounts?
qDescribe a temporary difference that results in future deductible amounts?
qExplain the purpose of a reporting date review of deferred tax assets?
qDescribe the presentation of income tax expense in the income statement?
qDescribe various temporary and permanent differences?
qExplain the effect of various tax rates and tax rate changes on deferred income taxes?
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