ACCT 5942

ACCOUNTING FOR
COMPANY INCOME TAX
Practice Quiz Question 15 & Question 16

By : Tushar Soni z5001270

Margareth Verdiana z3494390

QUESTION 15
Balchin Limited had the following deferred tax balances at
reporting date :
Deferred Tax Assets$ 12,000
Deferred Tax Liabilities $ 30,000
Effective from the first day of the next financial period, the
company rate of income tax was reduced from 40% to 30%. The
adjustment to income tax expense to recognise the impact of the
tax rate change is :
a. DR $ 1,800
b. DR $ 6,000
c. DR $ 4,500
d. CR $ 6,000
e. CR $ 4,500

AASB112 Paragraph 51

Deferred Tax Asset

Impact on Deferred Tax Asset
$ 12,000 x (40 - 30)/(40) = $ 3,000
Tax Rate decreases which means the future tax savings
arising from deferred tax assets will reduce by $ 3,000,
which means, the journal entry for Deferred Tax Asset part
would be :
CR. Deferred Tax Asset

$ 3,000

Deferred Tax Liability

Impact on Deferred Tax Liability
$ 30,000 x (40 - 30)/(30) = $ 7,500
It will produce a future gain, as liability represents future
tax obligation
The journal entry for Deferred Tax Liability part would be
DR. Deferred Tax Liability
$ 7,500

Putting DTA & DTL together

Journal Entry :
DR. Deferred Tax Liability
$ 7,500
CR.
Deferred Tax Asset
$ 3,000
DR. Deferred Tax Liability
$ 7,500
CR. Deferred tax Asset
$ 3,000
CR. Income Tax Expense(Deferred)
$ 4,500
As a result of reduction in tax rate from 40 % to 30%, the
reduction in Income Tax Expense (Deferred) by $ 4,500.

QUESTION 15
Balchin Limited had the following deferred tax balances at
reporting date :
Deferred Tax Assets$ 12,000
Deferred Tax Liabilities $ 30,000
Effective from the first day of the next financial period, the
company rate of income tax was reduced from 40% to 30%. The
adjustment to income tax expense to recognise the impact of the
tax rate change is :
a. DR $ 1,800
b. DR $ 6,000
c. DR $ 4,500
d. CR $ 6,000
e. CR $ 4,500

QUESTION 16
Sinfonia ltd made credit sales for this period of $100 000. The
allowance for doubtful debts for these sales is $3 000. For
taxation purposes the amount provided for doubtful debts is
not tax-deductible and the taxation office has included the $
100 000 in taxable income. Sinfonia also has accrued interest
revenue of $7000 that will not be taxed until it is received in
cash. The tax rate is 30%. What is deferred tax item to record
the tax effect ?
a. Deferred tax asset of $ 2100
b. None of the above
c. Deferred tax liability of $ 2100
d. Deferred tax liability of $ 900
e. Current tax liabilities of $ 900

Account Receivable &

Allowance for Doubtful Debts

Allowance for Doubtful Debts

ACCOUNTING
Accounting expense when regarded
as doubtful

TAX
Deductible when written off as bad
debt expense

Applying to the question

Credit Sales = $100,000.
Allowance for Doubtful Debts = $ 3,000.

Carrying
Amount

FTA

FDA

Tax
Base

$97,000

$0

$ 3,000

$100,000

CA < TB in Assets, results in Deferred Tax Assets (DTA).

Deferred Tax Asset = $ 900
Journal Entry
Dr. Deferred Tax Assets

$ 900

However, NOT TAX DEDUCTIBLE. In this case, we will not consider the tax effect of this
Allowance for Doubtful Debts.

Accrued Interest Revenue

ACCOUNTING
Recognised as revenue when earned

TAX
Recognised as Taxable Income when
cash received

Applying to the question

Carrying
Amount

FTA

FDA

Tax
Base

$7,000

$ 7,000

$0

$0

CA > TB in Asset, results in Deferred Tax Liabilities (DTL)

Effects of Tax Rate

Tax Rate = 30 %
Taxable Temporary Differences = $ 7,000
Deferred Tax Liability = $ 7,000 x 30 % = $ 2,100
Journal Entry
Dr. Income Tax Expense
Cr. Deferred Tax Liability

$ 2,100
$ 2,100

QUESTION 16
Sinfonia ltd made credit sales for this period of $100 000. The
allowance for doubtful debts for these sales is $3 000. For
taxation purposes the amount provided for doubtful debts is
not tax-deductible and the taxation office has included the $
100 000 in taxable income. Sinfonia also has accrued interest
revenue of $7000 that will not be taxed until it is received in
cash. The tax rate is 30%. What is deferred tax item to record
the tax effect ?
a. Deferred tax asset of $ 2100
b. None of the above
c. Deferred tax liability of $ 2100
d. Deferred tax liability of $ 900
e. Current tax liabilities of $ 900

Thank You