Question Tag: Temporary Differences

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  • 20 Marks

CR – May 2016 – L3 – Q3 – Income Taxes (IAS 12)

Discuss and account for deferred taxation arising from temporary differences using IAS 12 for Limelight Plc.

Limelight, a public limited company, is a major player in commodity brokerage and supplies. The following transactions relate to the year ended December 31, 2014.

Profit before taxation for the year was ₦487.5m. Taxable profit for the same period was ₦131.25m.

The balances of non-current assets of the company, at December 31, 2014:

N’000 Amount
Accounting carrying amount 937,500
Tax written down value 637,500

The balances above do not include a freehold building purchased in February 2014 for ₦750m. This building was revalued to ₦985m on December 31, 2014.

Accrued rental income on investment property at December 31, 2014, amounted to ₦9.75m. This income was credited to the statement of profit or loss as at year-end but was not received until three months after. Rental income is taxed by the Federal Inland Revenue Service on an actual basis when it is received.

No other temporary differences exist at December 31, 2014. Income tax and Withholding taxes on rental income are paid at 30% and 10% respectively, six months after the year.

Required:

a) Discuss the conceptual basis for the recognition of deferred taxation by Limelight Plc using the temporary difference approach in accordance with IAS 12, arising from the above transactions.

b (i) Outline how the above transactions should be accounted for using journal entries where appropriate.

b (ii) Calculate the provision for deferred tax after any necessary adjustments to the financial statements at December 31, 2014, and use journal entries.

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  • 15 Marks

CR – May 2018 – L3 – SC – Q5b – Consolidated Financial Statements (IFRS 10)

Compute deferred tax provision and charge for Tola Plc. as of December 31, 2017.

The following information relates to Tola Plc. as at December 31, 2017:

Description Carrying Amount (N) Tax Base (N)
Plant and equipment 250,000 218,750
Receivables:
Trade receivables 62,500 68,750
Interest receivable 1,250 0
Payables:
Fine 12,500 0
Interest payable 2,500 0

Further information:

  1. The trade receivables balance includes balances of N68,750 less a specific doubtful debt provision of N6,250.
  2. Deferred tax balance as of January 1, 2017, was N1,500.
  3. Interest is taxed on a cash basis.
  4. Doubtful debt allowances are not tax-deductible; receivables are only deductible upon a court order.
  5. Fines are non-deductible for tax purposes.
  6. The tax rate for 2017 is 30%, with an anticipated rise to 36% in 2018.

Required:

Compute the deferred tax provision required as of December 31, 2017, and the charge to profit or loss for the period in accordance with IAS 12 – Income Taxes.
(11 Marks)

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  • 3 Marks

FR – Nov 2023 – L2 – Q5a – Accounting for Income Taxes (IAS 12)

Define deferred tax, permanent differences, and temporary differences per IAS 12.

Explain the following terms in accordance with IAS 12 – Income tax.
i. Deferred tax
ii. Permanent differences
iii. Temporary differences

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  • 20 Marks

FR – May 2024 – L2 – SA – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explains temporary differences, components of tax expense, and deferred tax calculations for Buga Nigeria Limited.

a. Accounting for deferred tax is based on the identification of temporary differences.

Required:
Explain the term “Temporary difference” and discuss the TWO different types. (3 Marks)

b. State and briefly explain FIVE components of tax expense or income. (5 Marks)

c. Buga Nigeria Limited had an accounting profit before taxation of N196,800,000 for the year ended September 30, 2022. The following balances were extracted from the company’s books as at September 30, 2022.

Other information:

  1. Interest income is taxed while interest expense is allowable on a cash basis. There were no opening balances on interest receivable and interest payable.
  2. The trade receivables above are shown net of an allowance for doubtful balances of N16,750,000. This is the first year that such an allowance has been recognized. A deduction for debts is only allowed for tax purposes when the debtor is in the process of winding-up.
  3. The balances in respect of office equipment are after charging accounting depreciation of N28,250,000 and tax allowable depreciation of N22,500,000 respectively.
  4. The freehold property was purchased on October 1, 2021, for N263,000,000 and is being depreciated for accounting purposes on a 10% per annum basis. Buga Nigeria Limited is in a position to claim N94,600,000 as accelerated depreciation on cost as a taxable expense in this year’s tax computation.

Required:

i. Prepare a tax computation and calculate the current tax expense. (4 Marks)

ii. Calculate the deferred tax liability as at September 30, 2022. (6 Marks)

iii. Show the movement on the deferred tax account for the year ended September 30, 2022, given that the opening balance was N8,100,000. (2 Marks)

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  • 8 Marks

FR – May 2018 – L2 – Q6b – Accounting for Income Taxes (IAS 12)

Calculate the deferred tax charge/credit for Lawmarg Nigeria Limited and the deferred tax balance in the statement of financial position.

Lawmarg Nigeria Limited purchased an item of plant for N2,000,000 on October 1, 2014. It had an estimated life of eight years and an estimated residual value of N400,000. The plant is depreciated on a straight-line basis. The tax authorities do not allow depreciation as a deductible expense. Instead, an initial capital allowance of 40% of the cost of this type of asset can be claimed against income tax, and 20% per annum (on a reducing balance basis) of its tax base thereafter. The rate of income tax is 30%.

Required: In respect of the above item of plant, calculate the deferred tax charge/credit in Lawmarg Nigeria Limited’s statement of profit or loss for the year ended December 31, 2017, and the deferred tax balance in the statement of financial position at that date.

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  • 7 Marks

FR – May 2018 – L2 – Q6a – Accounting for Income Taxes (IAS 12)

Explain the need for providing deferred tax and the principles for accounting for deferred tax under IAS 12.

IAS 12 – Income Tax details the requirements relating to the accounting treatment of deferred tax and current income tax.

Required: Explain the need to provide for deferred tax and briefly outline the principles of accounting for deferred tax contained in IAS 12.

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  • 6 Marks

FR – Mar 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculation of deferred tax liability considering temporary differences in various assets and liabilities, including tax base and carrying values.

The Financial Accountant of Abodie Ltd is finalising the financial statements of Abodie Ltd for the year ended 31 August 2021. The following items are being considered for deferred tax purposes:

  • At year end, Abodie Ltd’s property, plant & equipment had a tax base and carrying value of GH¢72 million and GH¢95 million, respectively.
  • The company’s provision for decontamination costs was GH¢11 million (appropriately discounted) at the year end. Decontamination costs are tax deductible when paid.
  • The company had inventory with a carrying value of GH¢24 million. This did not agree with the tax base because of a GH¢3 million write-down for obsolete items. Tax relief is only granted for inventories upon sale.
  • The company incurred GH¢15 million in respect of new software development during the year, which was capitalised and will be amortised over the next 5 years. Full year’s charge is required in the first year of completion or purchase. This cost was deducted in the current year for tax purposes. The company is liable for income tax at 30%.

Required:

Compute the company’s deferred tax liability at 31 December 2021.

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  • 2 Marks

FR – Nov 2018 – L2 – Q2e- Financial Reporting Standards and Their Applications

This question tests the explanation of temporary differences in relation to deferred tax liabilities and assets under IAS 12.

In accordance with IAS 12: Income Taxes, deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

Required:
Explain temporary differences.

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  • 20 Marks

CR – May 2016 – L3 – Q3 – Income Taxes (IAS 12)

Discuss and account for deferred taxation arising from temporary differences using IAS 12 for Limelight Plc.

Limelight, a public limited company, is a major player in commodity brokerage and supplies. The following transactions relate to the year ended December 31, 2014.

Profit before taxation for the year was ₦487.5m. Taxable profit for the same period was ₦131.25m.

The balances of non-current assets of the company, at December 31, 2014:

N’000 Amount
Accounting carrying amount 937,500
Tax written down value 637,500

The balances above do not include a freehold building purchased in February 2014 for ₦750m. This building was revalued to ₦985m on December 31, 2014.

Accrued rental income on investment property at December 31, 2014, amounted to ₦9.75m. This income was credited to the statement of profit or loss as at year-end but was not received until three months after. Rental income is taxed by the Federal Inland Revenue Service on an actual basis when it is received.

No other temporary differences exist at December 31, 2014. Income tax and Withholding taxes on rental income are paid at 30% and 10% respectively, six months after the year.

Required:

a) Discuss the conceptual basis for the recognition of deferred taxation by Limelight Plc using the temporary difference approach in accordance with IAS 12, arising from the above transactions.

b (i) Outline how the above transactions should be accounted for using journal entries where appropriate.

b (ii) Calculate the provision for deferred tax after any necessary adjustments to the financial statements at December 31, 2014, and use journal entries.

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  • 15 Marks

CR – May 2018 – L3 – SC – Q5b – Consolidated Financial Statements (IFRS 10)

Compute deferred tax provision and charge for Tola Plc. as of December 31, 2017.

The following information relates to Tola Plc. as at December 31, 2017:

Description Carrying Amount (N) Tax Base (N)
Plant and equipment 250,000 218,750
Receivables:
Trade receivables 62,500 68,750
Interest receivable 1,250 0
Payables:
Fine 12,500 0
Interest payable 2,500 0

Further information:

  1. The trade receivables balance includes balances of N68,750 less a specific doubtful debt provision of N6,250.
  2. Deferred tax balance as of January 1, 2017, was N1,500.
  3. Interest is taxed on a cash basis.
  4. Doubtful debt allowances are not tax-deductible; receivables are only deductible upon a court order.
  5. Fines are non-deductible for tax purposes.
  6. The tax rate for 2017 is 30%, with an anticipated rise to 36% in 2018.

Required:

Compute the deferred tax provision required as of December 31, 2017, and the charge to profit or loss for the period in accordance with IAS 12 – Income Taxes.
(11 Marks)

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  • 3 Marks

FR – Nov 2023 – L2 – Q5a – Accounting for Income Taxes (IAS 12)

Define deferred tax, permanent differences, and temporary differences per IAS 12.

Explain the following terms in accordance with IAS 12 – Income tax.
i. Deferred tax
ii. Permanent differences
iii. Temporary differences

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  • 20 Marks

FR – May 2024 – L2 – SA – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explains temporary differences, components of tax expense, and deferred tax calculations for Buga Nigeria Limited.

a. Accounting for deferred tax is based on the identification of temporary differences.

Required:
Explain the term “Temporary difference” and discuss the TWO different types. (3 Marks)

b. State and briefly explain FIVE components of tax expense or income. (5 Marks)

c. Buga Nigeria Limited had an accounting profit before taxation of N196,800,000 for the year ended September 30, 2022. The following balances were extracted from the company’s books as at September 30, 2022.

Other information:

  1. Interest income is taxed while interest expense is allowable on a cash basis. There were no opening balances on interest receivable and interest payable.
  2. The trade receivables above are shown net of an allowance for doubtful balances of N16,750,000. This is the first year that such an allowance has been recognized. A deduction for debts is only allowed for tax purposes when the debtor is in the process of winding-up.
  3. The balances in respect of office equipment are after charging accounting depreciation of N28,250,000 and tax allowable depreciation of N22,500,000 respectively.
  4. The freehold property was purchased on October 1, 2021, for N263,000,000 and is being depreciated for accounting purposes on a 10% per annum basis. Buga Nigeria Limited is in a position to claim N94,600,000 as accelerated depreciation on cost as a taxable expense in this year’s tax computation.

Required:

i. Prepare a tax computation and calculate the current tax expense. (4 Marks)

ii. Calculate the deferred tax liability as at September 30, 2022. (6 Marks)

iii. Show the movement on the deferred tax account for the year ended September 30, 2022, given that the opening balance was N8,100,000. (2 Marks)

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  • 8 Marks

FR – May 2018 – L2 – Q6b – Accounting for Income Taxes (IAS 12)

Calculate the deferred tax charge/credit for Lawmarg Nigeria Limited and the deferred tax balance in the statement of financial position.

Lawmarg Nigeria Limited purchased an item of plant for N2,000,000 on October 1, 2014. It had an estimated life of eight years and an estimated residual value of N400,000. The plant is depreciated on a straight-line basis. The tax authorities do not allow depreciation as a deductible expense. Instead, an initial capital allowance of 40% of the cost of this type of asset can be claimed against income tax, and 20% per annum (on a reducing balance basis) of its tax base thereafter. The rate of income tax is 30%.

Required: In respect of the above item of plant, calculate the deferred tax charge/credit in Lawmarg Nigeria Limited’s statement of profit or loss for the year ended December 31, 2017, and the deferred tax balance in the statement of financial position at that date.

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  • 7 Marks

FR – May 2018 – L2 – Q6a – Accounting for Income Taxes (IAS 12)

Explain the need for providing deferred tax and the principles for accounting for deferred tax under IAS 12.

IAS 12 – Income Tax details the requirements relating to the accounting treatment of deferred tax and current income tax.

Required: Explain the need to provide for deferred tax and briefly outline the principles of accounting for deferred tax contained in IAS 12.

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  • 6 Marks

FR – Mar 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculation of deferred tax liability considering temporary differences in various assets and liabilities, including tax base and carrying values.

The Financial Accountant of Abodie Ltd is finalising the financial statements of Abodie Ltd for the year ended 31 August 2021. The following items are being considered for deferred tax purposes:

  • At year end, Abodie Ltd’s property, plant & equipment had a tax base and carrying value of GH¢72 million and GH¢95 million, respectively.
  • The company’s provision for decontamination costs was GH¢11 million (appropriately discounted) at the year end. Decontamination costs are tax deductible when paid.
  • The company had inventory with a carrying value of GH¢24 million. This did not agree with the tax base because of a GH¢3 million write-down for obsolete items. Tax relief is only granted for inventories upon sale.
  • The company incurred GH¢15 million in respect of new software development during the year, which was capitalised and will be amortised over the next 5 years. Full year’s charge is required in the first year of completion or purchase. This cost was deducted in the current year for tax purposes. The company is liable for income tax at 30%.

Required:

Compute the company’s deferred tax liability at 31 December 2021.

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  • 2 Marks

FR – Nov 2018 – L2 – Q2e- Financial Reporting Standards and Their Applications

This question tests the explanation of temporary differences in relation to deferred tax liabilities and assets under IAS 12.

In accordance with IAS 12: Income Taxes, deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

Required:
Explain temporary differences.

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