Lourens Ltd commenced business on 1 July 2017. Before consideration of the items

Question

Lourens Ltd commenced business on 1 July 2017. Before consideration of the items below, profit in its first year of operation was $300 000. (There were no differences between the accounting and tax treatments in arriving at that figure.) The following items have yet to be taken into account:

Property, plant and equipment was acquired on 1 July 2017 at a cost of $500 000. Depreciation is 20% per annum straight-line for accounting purposes and 30% reducing-balance for tax purposes.

The company recognised warranty expenses of $25 000, but warranty payments were only $5 000.

Accounts receivable at 30 June 2018, $300 000, doubtful debts expense, $15 000, and bad debts written off during the period, $2 500.

Employee benefits (annual leave and long-service leave) expense, $25 000; employee benefits liability as at 30 June 2018, $21 000.

The tax rate is 30%.

Required

Using the statement of financial position approach to tax allocation in AASB 112:

Calculate taxable income and prepare the general journal entry to record current income tax expense; and

Identify any temporary differences, determine the amount of any resulting deferred tax asset or deferred tax liability, and prepare the general journal entry to record deferred tax expense

Explanation / Answer

Calculation of Taxable Income:

Profit in the First year of Operations - 300000

Less : Depreciation to be allowed - 50000 (as per income tax act (500000*(30-20%))

Add : Dissallowed Warrantee Expenses - 20000 (25000-5000)

Add: Provision for Bad and Doubtfuldebts - 12500 (15000-2500)

Add : Employee Benfits Not allowed - 4000 (25000-21000)

-----------------------------------------------

Taxable Income 286500

--------------------------------------------------

Journal Entry

Tax as per the Financial Accounting - 300000*30% - 90000

Tax payable on taxable income - 286500*30% - 85950

Deffered Tax Asset - 4050

Entry :

Current Tax Account Ac - Dr 85950

Deffered Tax Asset A/c Dr 4050

To Tax Expenses Account --90000

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