FR – L2 – Q49 – Financial Reporting Standards and Their Applications

Calculate Shey Ltd's corporate income tax liability for 20X5, considering adjustments for interest, provisions, and fines.

Question

Continuing from the previous year. The following information is relevant for the year ended 31st December 20X5.

(a) Capital transactions

	GHe
Depreciation charged	14,000
Tax allowances	16,000

(b) Interest payable
On 1st April 20X5 the company issued GH₵25,000 of 8% convertible loan stock. Interest is paid in arrears on 30th September and 30th March. Assume that tax relief on interest expense is only given when the interest is paid.

(c) Interest receivable
On 1st April Shey Ltd purchased debentures having a nominal value of GH₵4,000. Interest at 15% pa is receivable on 30th September and 30th March. Assume that interest income is not taxed until the cash is actually received.

(d) Provision for warranty
In preparing the financial statements for the year to 31st December 20X5, Shey Ltd has recognised a provision for warranty payments in the amount of GH₵1,200. This has been correctly recognised in accordance with IAS 37 and the amount has been expensed. Assume that tax relief on the warranty cost is only given when the expense is paid.

(e) Fine
During the period Shey Ltd has paid a fine of GH₵6,000. The fine is not tax deductible.

(f) Further information
The accounting profit before tax for the year was GH₵125,000.

Tax is chargeable at a rate of 30%.

Required
(a) Calculate the corporate income tax liability for the year ended 31st December 20X5.

(b) Calculate the deferred tax balance that is required in the statement of financial position as at 31st December 20X5.

(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 20X5.

(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense for the year ended 31st December 20X5.

(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax expense for year ended 31st December 20X5.

Answer

(a). Corporate income tax liability – year-ended 31st December 20X5

	GHe
Profit per accounts	125,000
Add: Depreciation	14,000
Add: Warranty provision	1,200
Add: Interest payable (6/12 x 8% x 25,000)	1,000
Add: Fine	6,000
Less: Tax depreciation	(16,000)
Less: Interest receivable (6/12 x 15% x 4,000)	(300)
Taxable profits	130,900
Tax payable @ 30%	39,270

(b). Deferred tax liability

	GHe
Carrying amount ((48,000 + 12,000 – 11,000 – 14,000) + (25,000 – 2,000))	58,000
Tax base ((48,000 + 12,000 – 15,000 – 16,000) + (25,000 – 25,000))	29,000
Temporary difference	29,000
Add: Warranty provision	1,200
Less: Interest receivable (6/12 x 15% x 4,000)	(300)
Add: Interest payable (6/12 x 8% x 25,000)	1,000
Total temporary difference	30,900
Deferred tax liability required @ 30%	9,270

(c). Movement on the deferred tax liability

	GHe
Balance b/f	3,600
Statement of profit or loss (balancing figure)	5,670
Balance c/f	9,270

(d).

Statement of profit or loss note

	GHe
Current tax expense	39,270
Deferred tax expense	5,670
Tax expense	44,940

(e). Reconciliation of tax expense

	GHe
Accounting profit before tax	125,000
Tax at 30%	37,500
Non-deductible fine (6,000 x 30%)	1,800
Warranty provision (1,200 x 30%)	360
Interest payable (1,000 x 30%)	300
Interest receivable (300 x 30%)	(90)
Depreciation (14,000 x 30%)	4,200
Tax depreciation (16,000 x 30%)	(4,800)
Tax expense	44,940

Tags: Accounting Profit, Financial Statements, Tax Expense, Tax Reconciliation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Uploader: Samuel Duah