- 12 Marks
FR – L2 – Q53 – Financial Reporting Standards
Question
Talu Ghana Limited owns the following property, plant and equipment as at 31 December 20X6.
| Cost | Accumulated Depreciation | Carrying Amount | |
|---|---|---|---|
| GHe’000 | GHe’000 | GHe’000 | |
| Plant & machinery | 45,000 | 9,000 | 36,000 |
| Land | 25,000 | – | 25,000 |
| Office buildings | 75,000 | 15,000 | 60,000 |
Additional pieces of information are:
(i) Plant and machinery are depreciated on a straight-line basis over 5 years. The plant & machinery was acquired on 1 January 20X6.
(ii) Land is not depreciated
(iii) Buildings are depreciated on a straight-line basis over 25 years.
(iv) Depreciation on office building is not deductible for tax purposes but for the plant and machinery; tax deductible is granted over a period of 3 years in the ratio 50:30:20 percent of cost consecutively.
(v) The accounting profit before tax amounted to GH₵15,000,000 for the 20X7 financial year and GH₵20,000,000 for year 20X8. These figures include non-taxable revenue of GH₵4,000,000 in year 20X7 and GH₵5,000,000 in year 20X8.
(vi) Talu Nig. Ltd had a tax loss on 31 December 20X6 of GH₵12,500,000. The tax rate for year 20X6 was 35% and 30% for each of years 20X7 and 20X8.
Required:
(a) In accordance with IAS 12 on Income Taxes, differentiate between current tax and deferred tax.
(b). Prepare the deferred tax account for the year ended 31 December 20X8.
Answer
(a). Current Tax: is the amount actually payable to the tax authorities in relation to the trading activities of the entity during the period.
Deferred Tax is the amount payable to or refundable by the tax authorities in respect of the current and previous periods on taxable profit. It is also considered as an accounting measure used to match the tax effect of transactions with their accounting impact and thereby produce less distorted results.
(b) Deferred Tax Account as at 31 December 20X8
1 January 20X7 balance
Plant & Machinery (13,500,000 × 35%)
Tax less carried forward (12,000,000 × 35%)
Balance 1 January 20X7
Rate of change (350,000 × 5/35)
Temporary difference: plant & machinery (w1)
Loss utilised (w2) 9,500,000 × 30%
Balance 31 December 20X7
Temporary difference plant & machinery (WI)
Loss utilised (2) GH₵3,000,000 × 30%
Balance 31 December 20X8
Workings
Plant
| Carrying Amount GH₵’000 | Tax Base GH₵’000 | Temporary difference GH₵’000 | Deferred Tax GH₵’000 | |
|---|---|---|---|---|
| 1 Jan 20X6 – cost | 45,000 | 45,000 | ||
| Depreciation | (9,000) | (22,500) | 13,500 | 4,725 |
| 31 Dec. 20X6 | 36,000 | 22,500 | 13,500 | 4,725 |
| Rate charge (5/35 × 4,725) | ||||
| Depreciation | (9,000) | (13,500) | 4,500 | 1,350 |
| 31 December 20X7 | 27,000 | 9,000 | 18,000 | 5,400 |
| Depreciation | (9,000) | |||
| 31 Dec 20X8 | 18,000 | 18,000 | 5,400 |
Income Tax Expense
| 31 Dec. 20X8 GH₵’000 | |
|---|---|
| Accounting profit before Tax | 20,000 |
| Tax effect of item not deductible | |
| Non-taxable revenue | (5,000) |
| Depreciation on building | 3,000 |
| 18,000 | |
| Depreciation Accounting | 9,000 |
| Depreciation/allowable tax | (9,000) |
| Taxable profit | 18,000 |
| Assessed loss b/fwd | 13,000 |
| Taxable profit/(loss c/fwd) | 15,000 |
| Tax payable/benefit at 30% | (4,000) |
| 3,000 | |
| 14,000 | |
| 9,000 | |
| (13,500) | |
| 9,500 | |
| (12,500) | |
| (3,000) | |
| (900) |
Reasons why deferred Tax should be recognised or provided for by Talu Ghana Limited are as follows:
Adjustment for deferred tax are made in accordance with the actual concept and in accordance with the definition of a liability in the conceptual framework i.e. a past event has given rise to an obligation in the form of increased taxation which will be payable in the future. The amount can be reliably estimated.
If the future tax consequences of transaction are not recognised or provided for, profit can be overstated leading to overpayment of dividend and distortion of share price and Earnings Per Share (EPS).
- Tags: Deferred Tax, IAS 12, Plant and Machinery, Tax Accounting, Tax Losses
- Level: Level 2
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