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Deferred tax calculation

ABC Company has the following items in its audited financial statements for the year ended 31 March 2011.

(i) Freehold land costing $100 million is revalued to $150 million. For tax purposes, there is no depreciation. Gain or losses on disposal of land at the revalued amount will be taxable.

(ii) A machine cost $200 million and tax depreciation was $120 million. The machine has been depreciated for accounting purposes by $150 million.

(iii) Inventories have carrying value of $8 million after deducting a $4 million allowance for obsolescence. This allowance for obsolescence has not yet been deducted for tax purposes but is expected to give rise to a future deductible amount when inventories are eventually sold.

(iv) Accounts receivable has a carrying value of $6 million (gross amount $8 million less $2 million allowance for doubtful debts). The allowance for doubtful debts has not yet been deducted for tax purpose but is expected to give rise to future deductible amount when customers' account is settled.

(v) Unearned revenue of $12 million has been adjusted in the income statement. the related revenue was already taxed on cash basis and no further tax will arise.

(vi) Wages accrued for the current reporting period amounted to $5 million. For tax purposes, wages expenses have already been deducted in the same year in which they are recognized as expense for accounting purposes.

(vii) Environmental provisions of $2 million were accrued to comply with the newly enacted environment protection law. No payment has ever been made. These costs would be deductible for tax purposes when they are paid.

Required:

(a) Determine the tax base, temporary difference and its related tax consequences for the above items, assuming a tax rate of 15%

(b) Prepare related income tax journal entries. (Narratives are not necessary)

Solution Summary

Accounting base
tax base
temporary differences
Deferred tax calculation
Journa entry for deferred tax

$2.19