- 20 Marks
FR – L2 – Q50 – Corporate Reporting and Compliance
Question
Continuing from the previous year. The following information is relevant for the year ended 31st December 20X6.
(a) Interest payable/Interest receivable
Sheen Ltd still has GH₵25,000 of 8% convertible loan stock in issue and still retains its holding in the debentures purchased in 20X5.
(b) Provision for warranty
During the year Sheen Ltd had paid out GH₵500 in warranty claims and provided for a further GH₵2,000.
(d) Development costs
During 20X6 Sheen Ltd has capitalised development expenditure of GH₵17,800 in accordance with the provisions of IAS 38. Assume that tax relief on this expenditure is taken in full in the period in which it is incurred.
(e) Further information
Profit before taxation
Depreciation charged
Tax allowable depreciation
175,000
18,500
24,700
(f) Entertainment
Sheen Ltd paid for a large office party during 20X6 to celebrate a successful first two years of the business. This cost GH₵20,000. Assume that this expenditure is not tax deductible.
Tax is chargeable at a rate of 30%.
Required
(a) Calculate the corporate income tax liability for the year ended 31st December 20X6.
(b) Calculate the deferred tax balance that is required in the statement of financial position as at 31st December 20X6.
(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 20X6.
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense for the year ended 31st December 20X6.
(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 20X6.
Answer
(a). Corporate income tax liability – year-ended 31st December 20X6
| Description | GH₵ |
|---|---|
| Profit before taxation | 175,000 |
| Add: Depreciation charged | 18,500 |
| Add: Entertainment | 20,000 |
| Add: Warranty provision | 2,000 |
| Less: Tax depreciation | (24,700) |
| Less: Development costs | (17,800) |
| Less: Warranty paid | (500) |
| Taxable profit | 172,500 |
| Tax payable @ 30% | 51,750 |
(b). Deferred tax liability
| Description | GH₵ |
|---|---|
| Carrying amount | |
| Plant and vehicles (60,000 – 11,000 – 14,000 – 18,500) | 16,500 |
| Development costs | 17,800 |
| Warranty provision (1,200 + 2,000 – 500) | (2,700) |
| Total carrying amount | 31,600 |
| Tax base | |
| Plant and vehicles (60,000 – 15,000 – 16,000 – 24,700) | 4,300 |
| Development costs | 0 |
| Warranty provision | 0 |
| Total tax base | 4,300 |
| Temporary difference | 27,300 |
| Deferred tax liability @ 30% | 8,190 |
(c). Movement on the deferred tax liability
| Description | GH₵ |
|---|---|
| Balance b/f | 4,800 |
| Statement of profit or loss (balancing figure) | 3,390 |
| Balance c/f | 8,190 |
(d). Statement of profit or loss note
| Description | GH₵ |
|---|---|
| Current tax expense | 51,750 |
| Deferred tax expense | 3,390 |
| Tax expense | 55,140 |
(e). Reconciliation of tax expense
| Description | GH₵ |
|---|---|
| Profit before tax | 175,000 |
| Tax at 30% | 52,500 |
| Add: Entertainment (20,000 × 30%) | 6,000 |
| Less: Warranty paid (500 × 30%) | (150) |
| Less: Additional tax depreciation ((24,700 – 18,500) × 30%) | (1,860) |
| Add: Warranty provision (2,000 × 30%) | 600 |
| Less: Development costs (17,800 × 30%) | (5,340) |
| Tax expense | 51,750 |
| Deferred tax expense | 3,390 |
| Total tax expense | 55,140 |
- Tags: Financial Reporting, IAS 12, Tax Expense, Tax Reconciliation
- Level: Level 2
- Uploader: Samuel Duah