FR – Nov 2018 – L2 – SB – Q3 – Accounting for Income Taxes (IAS 12)

Calculate the current tax expense, deferred tax liability, and tax expense components for Yemnike Nigeria Ltd.

Question

Yemnike Nigeria Limited has an accounting profit before taxation of N225 million for the year ended December 31, 2017.

The following are extracts of the financial position of Yemnike Nigeria Limited as at December 31, 2017:

Non-Current Assets:

Item	N’000
Building	157,500
Plant and machinery	250,000
Assets held under finance lease	200,000

Receivables:

Item	N’000
Trade receivables	182,500
Interest receivable	2,500

Payables:

Item	N’000
Fines	25,000
Finance lease obligation	216,000
Interest payable	8,250

The following information is relevant:

The building was acquired by the company at a cost of N175 million at the start of the year, and it is depreciated at 10% per annum on a straight-line basis. The company’s tax consultants have stated that the company can claim N105 million capital allowance this year on the building.
The balance of plant and machinery is after providing for depreciation of N30 million, and the capital allowance claimable on it is N25 million.
The asset held under finance lease was acquired during the year. Rental expense for the lease is tax deductible. The annual lease rental is N72 million and was paid on December 31, 2017. The depreciation policy for leased assets is 20% per annum on a straight-line basis. The annual finance charge is N36.667 million.
The receivables figure is shown net of an allowance for doubtful balances of N17.5 million. A deduction for debt is only allowed for tax purposes when the debtor enters liquidation.
Interest income is taxed, and interest expense is allowable both on a cash basis. There were no opening balances for interest receivable and payable.
Provisions for fines and penalties are not allowable deductions for tax purposes.

Required:
(a) Calculate the current tax expense for the period.
(b) Calculate the deferred tax liability as at December 31, 2017.
(c) Prepare notes showing the component of the tax expense for the year.

Answer

(a) Calculation of Current Tax Expense:

Item	N’000
Accounting profit	225,000
Add back non-deductible expenses:
Depreciation on building (N175m x 10%)	17,500
Depreciation on plant and machinery	30,000
Increase in allowance for doubtful debts	17,500
Fines and penalties	25,000
Interest payable (accrued)	8,250
Depreciation on asset under finance lease	40,000
Finance charge on lease	36,667
Total non-deductible expenses	174,917
Less allowable deductions:
Capital allowance on building	(105,000)
Capital allowance on plant and machinery	(25,000)
Lease rentals	(72,000)
Interest income	(2,500)
Total allowable deductions	(204,500)
Taxable profit	195,417
Current tax expense @ 30%	58,625,100

(b) Calculation of Deferred Tax Liability as at December 31, 2017:

Item	Carrying Amount (N’000)	Tax Base (N’000)	Temporary Difference (N’000)
Building:
Cost	175,000	175,000	–
Depreciation/Capital Allowance	(17,500)	(105,000)	87,500 (L)
Plant and Machinery:
Cost	280,000	280,000	–
Depreciation/Capital Allowance	(30,000)	(25,000)	5,000 (A)
Finance Lease:
Carrying Amount	200,000	–	16,000 (A)
Obligation	216,000	–	–
Trade Receivables:
Carrying Amount	182,500	200,000	17,500 (A)
Interest Receivables:
Carrying Amount	2,500	–	2,500 (L)
Fines:
Carrying Amount	25,000	25,000	–
Interest Payable:
Carrying Amount	8,250	–	8,250 (A)

Total Temporary Differences:	N’000
Deferred Tax Liabilities (L): 87,500 + 2,500 = 90,000	27,000
Deferred Tax Assets (A): 5,000 + 16,000 + 17,500 + 8,250 = 46,750	14,025
Net Deferred Tax Liability:	12,975 (L)

(c) Tax Expense Components for the Year:

Item	N’000
Current tax expense	58,625.10
Deferred tax expense	12,975.00
Total tax expense for the year	71,600.10

Tags: Current Tax, Deferred Tax, Tax Expense
Level: Level 1

Topic: Accounting for Income Taxes (IAS 12)
Series: NOV 2018

Uploader: Kwame Aikins