Deferred Tax – Knowsia

FR – L2 – Q71 – Presentation of Financial Statements

Prepare Zestful Ltd's statement of profit or loss and financial position for 20X9, incorporating inventory adjustments, depreciation, tax, and joint operation.

Question

The following trial balance relates to Zestful Ltd as at 31st December 20X9.

Description	GH₵’000	GH₵’000
Revenue		213,800
Cost of sales	143,800
Operating expenses	22,400
Trade receivables	13,500
Bank		900
Closing inventories – 31st December 20X9 (note (i))	10,500
Interest expenses (note (iii))	5,000
Rental income from investment property		1,200
Plant and equipment – cost (note (ii))	36,000
Land and building – at valuation (note (ii))	63,000
Accumulated depreciation		16,800
Investment property – valuation 1st January 20X9 (note (ii))	16,000
Trade payables		11,800
Joint arrangement (note (v))	8,000
Deferred tax (note (iv))		5,200
Ordinary shares of 25p each		20,000
10% Redeemable preference shares of GH₵1 each		10,000
Retained earnings – 1st January 20X9		17,500
Revaluation surplus (note (ii))		21,000
Total	318,000	318,000

The following additional information is relevant:
(i) An inventory count on 31st December 20X9 listed goods with a cost of GH₵10.5 million. This includes some damaged goods that had cost GH₵800,000. These would require remedial work costing GH₵450,000 before they could actually be sold for an estimated GH₵950,000.
(ii) Non-current assets:

Plant: All plant, including that of the joint operation (note v), is depreciated at 12.5% on reducing balance basis.
Land and building: The land and building were revalued at GH₵15 million and GH₵48 million respectively on 1st January 20X9 creating a GH₵21 million revaluation surplus. At this date the building had a remaining life of 15 years. Depreciation policy is on a straight-line basis. Zestful Ltd does not make a transfer to realized profits in respect of excess depreciation. Depreciation on both the building and the plant should be charged to the cost of sales.
Investment property: On 31st December 20X9 a qualified surveyor valued the investment property at GH₵13.5 million. Zestful Ltd uses the fair value model in IAS 40 Investment Property to measure its investment property.
(iii) Interest expenses include interest on loan notes and an ordinary dividend of 4p per share that was paid in June 20X9.
(iv) The directors have estimated the provision for income tax for the year ended 31st December 20X9 at GH₵8 million. The deferred tax provision ended 31st December 20X9 is to be adjusted (through the profit or loss) to reflect the tax base of the company’s net assets is GH₵12 million less than their carrying amounts. The rate of tax is 30%.
(v) On 1 January 20X9 Zestful Ltd entered into a joint arrangement with other entities. Each venturer contributes their own assets and is responsible for their own expenses including depreciation assets of the joint arrangement. Zestful Ltd is entitled to 40% of the joint venture’s total turnover. The joint arrangement is not a separate entity and is regarded as a joint operation.
Details of Zestful Ltd joint venture transactions are:

Description	GH₵’000
Plant and equipment at cost	12,000
Share of joint venture turnover (40% of total turnover)	8,000
Related joint venture cost of sales excluding depreciation	(5,000)
Trade receivables	1,500
Trade payables	(2,500)

Required:
Prepare a statement of profit or loss for the year ended 31 December 20X9 and a statement of financial position as at that date.

Answer

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Tags: Deferred Tax, Depreciation, Fair Value, Financial Statements, Inventory Valuation, Investment property, Joint Operations, Profit or Loss, Statement of Financial Position
Level: Level 2

Topic: Fair Value Measurement (IFRS 13)

FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

Question

AX LTD
Below is the summarised draft statement of financial position of AX Ltd, a company listed on the West Africa Stock Exchange, as at 31 March, 20X9:

Non-current assets
Property at valuation (land GH₵20,000; buildings GH₵165,000) (note ii)	185,000
Plant (note ii)	180,500
Financial assets at fair value through profit or loss at 1 April 20X8 (note iii)	12,500
	378,000
Current assets
Inventory	84,000
Trade receivables (note iv)	52,200
Bank	3,800
	140,000
Total assets	518,000

Equity and Liabilities
Equity
Stated capital	290,000
Capital surplus	12,300
Income surplus
– At 1 April 20X8	96,700
– For the year ended 31 March 20X9	12,300
	109,000
	411,300
Non-current liabilities
Deferred tax – at 1 April 20X8 (note v)	19,200
Current liabilities	81,800
	101,000
Total equity and liabilities	518,000

The following information is relevant:
(i) AX Ltd’s statement of profit or loss includes GH₵8million of revenue for credit sales made on a “sale or return” basis. At 31 March 20X9, customers who had not paid for the goods, had the right to return GH₵2.6million of them. AX Ltd applied a mark-up on cost of 30% on all these sales. In the past, AX Ltd’s customers have sometimes returned goods under this type of agreement.
(ii) The non-current assets have not been depreciated for the year ended 31 March 20X9. AX Ltd has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position as at 1 April 20X8 when the building had a remaining life of 15 years. A qualified surveyor has valued the land and buildings at 31 March 20X9 at GH₵180million. Plant is depreciated at 20% on the reducing balance basis.
(iii) The financial assets at fair value through profit or loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X8 the relevant index was 1,200 and at 31 March 20X9 it was 1,296.
(iv) In late March 20X9 the directors of AX Ltd discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time. Investigations revealed that a total of GH₵4 million of the trade receivables as shown in the statement of financial position at 31 March 20X9 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that GH₵1.5 million had been stolen in the year to 31 March 20X8 with the rest being stolen in the current year. AX Ltd is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purpose.
(v) During the year, the company’s taxable temporary differences increased by GH₵10 million of which GH₵6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the income tax rate is 20%.
(vi) The above figures do not include the estimated provision for income tax on the profit for the year ended 31 March 20X9. After allowing for any adjustments required in terms (i) to (iv), the directors have estimated the provision of GH₵11.4 million (this is in addition to the deferred tax effects of item (v).
(vii) During the year, dividends of GH₵15.5 million were paid. These have been correctly accounted for in the above statement of financial position.

Required:
Taking into account any adjustments required by items (i) to (vii) above:
(a) Prepare a statement showing the recalculation of AX Ltd’s profit for the year ended 31 March 20X9; and

(b) Redraft the statement of financial position of AX Ltd as at 31 March 20X9.

Answer

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Tags: Deferred Tax, Depreciation, Financial Position, Fraud, Inventory, Revaluation, Trade Receivables
Level: Level 2

Topic: Inventory Accounting

FR – L2 – Q55 – Financial Instruments

Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.

Question

On 1 January Year 1 Jordana PLC has the following capital and reserves.

Equity	GH₵
Share capital (1 million ordinary shares)	1,200,000
Retained earnings	5,670,300
	6,870,300

During Year 1 the following transactions took place.

1 January: An issue of GH₵100,000 8% GH₵1 redeemable preference shares at a premium of 60%. Issue costs are GH₵2,237. Redemption is at 100% premium on 31 December Year 5. The effective rate of interest is 9.5%.
31 March: An issue of 300,000 ordinary shares at a price of GH₵1.30 per share. Issue costs, net of tax benefit, were GH₵20,000.
30 June: A 1 for 4 bonus issue of ordinary shares.
Profit for the year, before accounting for the above, was GH₵508,500. The dividends on the redeemable preference shares have been charged to retained earnings.

Required
Set out capital and reserves and liabilities resulting from the above on 31 December Year 1.

Answer

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Tags: Accounting Standards, Convertible Loan Notes, Corporate Governance, Deferred Tax, Equity, Financial instruments, Financial Statements, Liabilities, Preference Shares, Share Capital
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q53 – Financial Reporting Standards

Differentiate between current tax and deferred tax per IAS 12 for Talu Ghana Limited.

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

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Tags: Deferred Tax, IAS 12, Plant and Machinery, Tax Accounting, Tax Losses
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q52 – Financial Reporting Standards and Their Applications

Calculate deferred tax liability for Francisca Ltd for 20X4, considering depreciation, interest, development costs, and revaluation, and show where changes are charged/credited.

Question

On 30 June 20X3 Francisca Ltd had a credit balance on its deferred tax account of GH¢1,340,600 all in respect of the difference between depreciation and capital allowances.

During the year ended 30 June 20X4 the following transactions took place.

(1) GH¢45 million was charged against profit in respect of depreciation. The tax computation showed capital allowances of GH¢50 million.

(2) Interest receivable of GH¢50,000 was reflected in profit for the period. However, only GH¢45,000 of interest was actually received during the year. Interest is not taxed until it is received.

(3) Interest payable of GH¢32,000 was treated as an expense for the period. However, only GH¢28,000 of interest was actually paid during the year. Interest is not an allowable expense for tax purposes until it is paid.

(4) During the year Francisca Ltd incurred development costs of GH¢500,600, which it has capitalised. Development costs are an allowable expense for tax purposes in the period in which they are paid.

(5) Land and buildings with a carrying amount of GH¢4,900,500 were revalued to GH¢6 million.

The tax rate is 30%. Francisca Ltd has a right of offset between its deferred tax liabilities and its deferred tax assets.

Required

Calculate the deferred tax liability on 30 June 20X4. Show where the increase or decrease in the liability in the year would be charged or credited.

Answer

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Tags: Deferred Tax, Development Costs, Financial Position, IAS 12, Interest Payable, Interest Receivable, Revaluation, Tax Computation, Temporary Differences
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Title: FR – L2 – Q48 – Taxation

Calculate Peak Ltd's corporate income tax liability for 20X4 based on profit, depreciation, and tax allowances.

Question

Peak Ltd was incorporated on 1 January 20X4. In the year ended 31 December 20X4 the company made a profit before taxation of GH¢121,000.
During the period Peak Ltd made the following capital additions:

GH¢
Plant	48,000
Motor vehicles	12,000

During the period:

GH¢
Accounting depreciation	11,000
Tax depreciation	15,000

Tax is chargeable at a rate of 30%.

Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 20X4.

(b) Calculate the deferred tax balance that is required in the statement of financial position as at 31st December 20X4.

(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 20X4.

(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense for the year ended 31st December 20X4.

Answer

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Tags: axation, Current Tax, Deferred Tax, Profit or Loss, Tax Expense
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Tag (SQ): Deferred Tax

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FR – L2 – Q71 – Presentation of Financial Statements

Prepare Zestful Ltd's statement of profit or loss and financial position for 20X9, incorporating inventory adjustments, depreciation, tax, and joint operation.

FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

FR – L2 – Q55 – Financial Instruments

Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.

FR – L2 – Q53 – Financial Reporting Standards

Differentiate between current tax and deferred tax per IAS 12 for Talu Ghana Limited.

FR – L2 – Q52 – Financial Reporting Standards and Their Applications

Calculate deferred tax liability for Francisca Ltd for 20X4, considering depreciation, interest, development costs, and revaluation, and show where changes are charged/credited.

Title: FR – L2 – Q48 – Taxation

Calculate Peak Ltd's corporate income tax liability for 20X4 based on profit, depreciation, and tax allowances.

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FR – L2 – Q71 – Presentation of Financial Statements

Prepare Zestful Ltd's statement of profit or loss and financial position for 20X9, incorporating inventory adjustments, depreciation, tax, and joint operation.

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FR – L2 – Q64 – Revenue from Contracts with Customers

Recalculate AX Ltd's profit for the year ended 31 March 20X9, adjusting for sale or return, depreciation, fraud, and tax.

You're reporting an error for "FR – L2 – Q64 – Revenue from Contracts with Customers"

FR – L2 – Q55 – Financial Instruments

Calculate capital, reserves, and liabilities for Jordana PLC after share issues and preference share transactions in Year 1.

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FR – L2 – Q53 – Financial Reporting Standards

Differentiate between current tax and deferred tax per IAS 12 for Talu Ghana Limited.

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FR – L2 – Q52 – Financial Reporting Standards and Their Applications

Calculate deferred tax liability for Francisca Ltd for 20X4, considering depreciation, interest, development costs, and revaluation, and show where changes are charged/credited.

You're reporting an error for "FR – L2 – Q52 – Financial Reporting Standards and Their Applications"

Title: FR – L2 – Q48 – Taxation

Calculate Peak Ltd's corporate income tax liability for 20X4 based on profit, depreciation, and tax allowances.

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