Professional Documents
Culture Documents
Outline the different treatments for accounting and tax purposes of the
following items:
(a) depreciation of non-current assets
(b) goodwill
(c) long-service leave payable
(d) allowance for doubtful debts
(e) entertainment costs
(f) prepaid insurance
(g) warranties liability
(h) rent received in advance.
(a) The accounting treatment for depreciation as per AASB 116 is to allocate the
depreciable amount of the asset on a systematic basis over the assets useful life.
The tax treatment is based on a set of rates provided by the tax office which is
usually different to the accounting depreciation rates.
(b) Purchased goodwill is for accounting purposes recognised and then tested for
impairment. For tax purposes, write-downs of goodwill are not allowed as a
deduction. Note AASB 112 provides an exclusion in this regard to temporary
differences. (See 6.4.3 of text).
(c) Long service leave is an accounting expense that is recognised as it is incurred,
however, for tax purposes it is only recognised as an allowable deduction when
the leave is actually taken by an employee and paid in cash.
(d) Doubtful/bad debts are recognised as an accounting expense when the likelihood
of recovering a debt is doubtful, whereas for tax purposes the deduction will only
be allowed when the debt is written out of the accounting records as bad.
(e) Entertainment expenses are an accounting expense, but for tax purposes are not an
allowable deduction.
(f) Prepaid insurance is recognised as an asset for accounting purposes and then
charged to expense over time. The tax treatment is to record the amount prepaid
as an allowable deduction immediately.
(g) Warranty expenses are recognised on the sale of the inventory for accounting
purposes, whereas for tax purposes the deduction is not allowed until the
inventory has been returned to be fixed and a warranty cost has been incurred.
(h) Rent received in advance is regarded as a liability for accounting purposes and
then recorded as income (revenue) over time. The common tax treatment is to
record the amount received in advance as taxable income immediately.
1
PRACTICE QUESTIONS
QUESTION 6.14
BARTLE FRERE LTD
A.
Taxable Income
for year ended 30 June 2014
Accounting profit before tax
Add
Bad debts expense
Depreciation expense plant
Long service leave
Annual leave
Office supplies used
Entertainment
Depreciation buildings
Rent received in advance
$600 000
60 000
50 000
45 000
30 000
15 000
18 000
8 000
35 000
861 000
Deduct
Rent revenue
Government grant received
Depreciation expense of plant for tax
Bad debts written off
Long service leave paid
Annual leave paid
Office supplies paid for
30 000
10 000
75 000
45 000
30 000
20 000
18 000
228 000
633 000
$189 900
Taxable income
Current tax liability = 30% x $633 000
Dr
Cr
189 900
189 900
40 000
60 000
100 000
Revenue
Ending balance
20 000
35 000
55 000
Cash
Ending balance
45 000
45 000
90 000
Cash
Ending balance
30 000
30 000
60 000
Accs Receivable
Ending balance
$185 000
(75 000)
110 000
Carrying
Amount
$
Assets
Cash
Inventory
Receivables
Supplies
Plant
Buildings
Goodwill
Liabilities
A/cs payable
LSL payable
Annual leave
payable
Rent in adv
Total
temporary
differences
Excluded
differences
Net
temporary
differences
Deferred tax
liability
Deferred tax
asset
Beginning
balances
Movement
during year
Adjustment
Taxable
Temp Diffs
Deductible
Temp
Diffs
$
80 000
170 000
445 000
25 000
240 000
152 000
70 000
(170 000)
(0)
(25 000)
(240 000)
(152 000)
(70 000)
170 000
55 000
0
110 000
0
0
80 000
170 000
500 000
0
110 000
0
0
55 000
290 000
60 000
40 000
0
0
(60 000)
(40 000)
290 000
0
0
60 000
40 000
25 000
(25 000)
25 000
25 000
130 000
152 000
70 000
377 000
180 000
222 000
155 000
180 000
46 500
54 000
(38 100)
(40 500)
-
8 400Cr
13 500 Dr
The journal entry required for the year ended 30 June 2014 would be:
Deferred Tax Asset
Deferred Tax Liability
Income Tax Exp/Income
Dr
Cr
Cr
13 500
8 400
5 100
Dr
Cr
Cr
*6 750
**6 350
400
The current tax liability would now be recorded by the following entry (assuming that
the entry had not been made previously)
Income Tax Expense
Current Tax Liability
$633 000 x 35%
Dr
Cr
221 550
221 550
The entry from the second worksheet would now appear as follows, as the change in
tax rate appears as a movement at the bottom of the worksheet:
155 000
Net
temporary
differences
Deferred tax
liability
(35%)
Deferred tax
asset (35%)
Beginning
balances
Movement
during year
Adjustment
180 000
54 250
63 000
Dr
Cr
Cr
(38 100)
(40 500)
(6 350)
(6 750)
9 800Cr
15 750 Dr
15 750
9 800
5 950