Rocket Limited (RL\') has been in business for a few years. It has a financial y

Question

Rocket Limited (RL') has been in business for a few years. It has a financial year-end at 31 December. As the business grows, there is an increasing difference in amounts between taxable and accounting profits and the management of RL has decided to adopt deferred tax accounting from now on. The following financial items have been extracted from the statements of financial position of 2016 and 2017 2017 2016 Carrying Tax base Carrying Tax base amount amoun $000 $000 28,000 20,000 S000 s000 18,000 16,000 Property, plant and equipment Research and development cost Inventory Account receivables Accrued expenses Provision for long service benefits Other payables 1,800 800 600 600 1,250 1,500 500 400 1,200 ,300 600 1,850 480 1,500 180 RL has always been a profitable operation and is likely that it will continue generating taxable profits in future years against which any resulting deferred tax assets can be utilized. The Inland Revenue Department also allows RL to offset current tax assets against current tax liability. Assume a corporate tax rate of 20%. Required a Discuss the rationale of providing for deferred tax and briefly outline the principles of accounting for deferred tax in HKAS 12 Income taxes b Determine the deferred tax assets and deferred tax liability for 2016 and 2017 Prepare the relevant journal entries to record the deferred tax adjustments for the years ended 31 December 2016 and 2017 c

Explanation / Answer

(a) The standards say that ‘deferred tax’ is the amount of income tax payable or receivable in future periods in respect of taxable temporary differences.

‘Temporary differences are differences between carrying amount of an asset or liability in the statement of financial position and its tax base.

Deferred tax assets and deferred tax liabilities can be calculated using the following formula:

Tax rate

(b)

3. 2016

DTA A/c dr 80

to Deferred tax exp 80

2017

Deferred tax exp a/c dr 820*

  to DTL 820

* Opening -80

recognised 820

Closing 740

  

Temporary difference = Carrying amount - Tax base Deferred tax asset or liability = Temporary difference x

Tax rate

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