ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
1
ACCT2542 Corporate Financial Reporting
and Analysis - 2023
Practice question for Assignment 1: Accounting for income tax
Please see the attached “Trial question - Student.xlsx”
Calculation of current and deferred tax, and adjustment entry
Albury Ltd
The profit before tax, as reported in the statement of profit and loss for Albury Ltd for the
year ended 30 June 2024, amounted to $400 000, including the following revenue and
expense items.
Sales revenue $ 2 600  000
Interest revenue 200  000
Government grant (non-taxable) 200  000
Cost of sales 1 600  000
Bad debts expense 40  000
Depreciation expense — equipment 40  000
Depreciation expense — plant 80  000
Research and development expense 320  000
Wages expense 480  000
Long service leave expense 80  000
The statement of profit and loss for Albury Ltd for the year ended 30 June 2024 also included
a gain on sale of equipment of $40 000. According to AASB 116/IAS 16, this gain is not
classified as revenue, but it is nevertheless part of the accounting profit before tax for the
year.
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
2
The draft statements of financial position of Albury Ltd at 30 June 2023 and 30 June 2024
showed the following assets and liabilities.
2023 2024
Assets
Cash $ 120  000 $ 120  000
Inventories 400  000 600  000
Accounts receivable 200  000 280  000
Allowance for doubtful debts (20  000 ) (40  000 )
Interest receivable 100  000 80  000
Equipment 120  000 —
Accumulated depreciation — equipment (60  000 ) —
Plant 800  000 800  000
Accumulated depreciation — plant (160  000 ) (240  000 )
Goodwill 60  000 60  000
Deferred tax asset 132  000 ?
Liabilities
Accounts payable 240  000 160  000
Wages payable 200  000 320  000
Revenue received in advance — 80  000
Loan payable 800  000 400  000
Provision for long service leave 160  000 120  000
Deferred tax liability 96  000 ?
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
3
Additional information
• In the year ended 30 June 2023, Albury Ltd had a tax loss of $260 000 that it carried over
in the deferred tax asset. In June 2024, the company received an amended assessment
for the year ended 30 June 2023 from the ATO, indicating that an amount of $20 000
claimed as a deduction has been disallowed. Albury Ltd has not yet adjusted its accounts
to reflect the amendment.
• Amounts received from sales, including those on credit terms, are taxed at the time the
sale is made. All other general taxation rules apply.
• The movement in the equipment account is caused by the sale of the equipment on 1
March 2024 for which a gain on sale of $40 000 was recognised as part of the profit before
tax (see above). Albury Ltd had purchased the equipment on 1 July 2022 (with an
estimated useful life of 2 years and no residual value) and for taxation purposes it claimed
its full cost as a deduction at 30 June 2023.
• The plant is depreciated on a straight-line basis over 10 years for accounting purposes,
but over 5 years for taxation purposes. The plant is not expected to have any residual
value.
• All research and development expenses were paid in cash during the year ended 30 June
2024.
• The company tax rate is assumed to be 30% for the year ended 30 June 2023 and 28% for
the year ended 30 June 2024. The balances of the deferred tax accounts at 30 June 2023
are still reflecting the 30% tax rate.
Required
1. Prepare the current tax worksheet and the journal entry to recognise current tax at 30
June 2024.
2. Prepare the deferred tax worksheet and journal entries to adjust deferred tax accounts.
(LO4 and LO5)
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
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Solution: Part 1
ALBURY LTD
Current tax worksheet
for year ended 30 June 2024
$ $
Accounting profit 400 000
Add:
Interest received 220 000
Bad debts expense 40 000
Depreciation expense – equipment 40 000
Depreciation expense – plant 80 000
Research and development expense 320 000
Wages expense 480 000
Long service leave expense 80 000
Revenue received in advance 80 000
Gain on equipment sold (tax) 60 000 1 400 000
1 800 000
Deduct:
Interest revenue 200 000
Government grant (tax exempt) 200 000
Bad debts written off 20 000
Depreciation – plant (tax) 160 000
Research and development expense 320 000
Wages paid 360 000
Long service leave paid 120 000
Gain on equipment sold (accounting) 40 000 (1 420 000)
Taxable profit 380 000
Add back exempt income 200 000
580 000
Tax loss recouped (240 000)
Taxable profit 340 000
Tax payable @ 28% 95 200
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
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Workings:
Interest received: opening balance of interest receivable ($100 000) + interest revenue ($200
000) – ending balance of interest receivable ($80 000) = $220 000.
Bad debts written off: opening balance of allowance for doubtful debts ($20 000) + bad debts
expense ($40 000) – ending balance of allowance for doubtful debts ($40 000) = $20 000.
Depreciation of plant for tax purposes: $800 000 / 5 = $160 000.
Wages paid: opening balance of wages payable ($200 000) + wages expense ($480 000) –
ending balance of wages payable ($320 000) = $360 000.
Long service leave paid: opening balance of provision for long service leave ($160 000) + long
service leave expense ($80 000) – ending balance of provision for long service leave ($120
000) = $120 000.
Gain on equipment sold for tax purposes: as there are no further tax deductions available,
the gain for tax purposes is equal to proceeds from sale = carrying amount of equipment sold
($120 000 - $60 000 - $40 000) + gain on sale for accounting purposes ($40 000) = $60 000.
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
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Those amounts (excluding the depreciation of plant and gain on equipment sold for tax
purposes) can also be calculated by recreating the ledgers for the affected accounts as
follows:
Interest receivable
$ $
Opening balance 100 000 Interest received 220 000
Interest revenue 200 000 Ending balance 80 000
300 000 300 000
Allowance for doubtful debts
$ $
Bad debts written off 20 000 Opening balance 20 000
Ending balance 40 000 Bad debts
expense
40 000
60 000 60 000
Wages payable
$ $
Wages paid 360 000 Opening balance 200 000
Ending balance 320 000 Wages expense 480 000
680 000 680 000
Provision for long service leave
$ $
Long service leave
paid
120 000 Opening balance 160 000
Ending balance 120 000 Long service leave
expense
80 000
240 000 240 000
Please note that the tax loss recouped is adjusted for the amount of $20 000 claimed as a
deduction that has been disallowed by ATO.
The entry to recognise current tax is:
Income tax expense (current) Dr 162 400
Current tax liability Cr 95 200
Deferred tax asset Cr 67 200
The entry affecting the deferred tax asset is recognised as part of the movement during the
year in the deferred tax worksheet at 30 June 2024.
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
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Solution: Part 2
ALBURY LTD
Deferred tax worksheet
As at 30 June 2024
Carrying
Amount
Future
Taxable
Amount
Future
Deductible
Amount
Tax Base Taxable
Temporary
Differences
Deductible
Temporary
Differences
$ $ $ $ $ $
Relevant
Assets
Accounts
receivable
240 000 0 40 000 280 000 40 000
Interest
receivable
80 000 80 000 0 0 80 000 -
Plant 560 000 560 000 320 000 320 000 240 000
Goodwill 60 000 60 000 0 0 60 000
Relevant
Liabilities
Wages
payable
320 000 0 320 000 0 320 000
Revenue
received in
advance
80 000 0 80 000 0 80 000
Provision for
long service
leave
120 000 0 120 000 0 120 000
Total
Temporary
Differences
380 000
560 000
Excluded
differences
(60 000)
Temporary
Differences
320 000 560 000
Deferred tax
liability (28%)
89 600
Deferred tax
asset (28%)
156 800
Beginning
balances
(96 000) (132 000)
Movements
during the
year
81 600 Cr
Adjustment (6 400)Dr 106 400Dr
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
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Note that the future deductible amount for plant is calculated as follows:
Future deductible amount for plant = Historical cost of total plant ($800 000) – Accumulated
tax depreciation of equipment ($480 000).
Accumulated tax depreciation of plant = Accumulated accounting depreciation of plant ($240
000) / accounting depreciation rate (10%) x tax depreciation rate (20%) = $480 000.
Note that the movement in the deferred tax accounts during the year include (in order):
1. Adjustment to deferred tax asset due to the amended tax assessment for the year ended
30 June 2023.
2. Adjustment to deferred tax asset and deferred tax liability due to the change in tax rate.
3. Adjustment to deferred tax asset due to the use of the adjusted carry forward tax losses
from the year ended 30 June 2023.
As a result of the amended tax assessment for the year ended 30 June 2023, the carry forward
tax losses for the year ended 30 June 2024 becomes $240 000 (decreased by $20 000) and
the opening balance of the deferred tax asset needs to be adjusted as follows (consider the
tax rate of 30% applicable before the change in tax rate) – this is considered a part of the
movement during the year before the use of the losses:
Income tax expense Dr 6 000
Deferred tax asset Cr 6 000
As a result of the change in tax rate from 30% for the year ended 30 June 2023 to 28% for the
year ended 30 June 2024, the adjusted opening balances of the deferred tax accounts need
to be further adjusted as follows (before the use of tax losses).
Deferred tax asset: ($132 000 - $6 000) / 30% x (30% – 28%) = $8 400 decrease
Deferred tax liability: $96 000 / 30% x (30% – 28%) = $6 400 decrease
The entry to adjust deferred tax accounts for the change in tax rate (recognised as part of the
movement during the year) is:
Income tax expense Dr 2 000
Deferred tax liability Dr 6 400
Deferred tax asset Cr 8 400
ACCT2542 Corporate Financial Reporting and Analysis – 2023
Practice question for Assignment 1: Accounting for income tax
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Therefore, the total movements in the deferred tax asset and liability during the year is as
follows.
• Deferred tax asset decreases by $67 200 + $6 000 + $8 400 = $81 600 (recognised in the
deferred tax worksheet as a credit) to $50 400.
• Deferred tax liability decreases by $6 400 (recognised in the deferred tax worksheet as a
debit) to $89 600.
Considering the effect of these movements on the opening balances of deferred tax asset and
deferred tax liability, the adjustment at the end of the period needed to bring those balances
to the ending balances calculated based on the net temporary differences are (included in the
deferred tax worksheet) as:
• Deferred tax asset needs to be adjusted from $50 400 to $156 800 by increasing it
with $106 400 (recognised in the deferred tax worksheet as a debit).
• Deferred tax liability does not need to be adjusted from $89 600.