Explain what “temporary differences” are and why do they arise? There are two methods to account for income tax expense: (i) the Taxes payable method, and (ii) the Interperiod tax allocation method.
Explain what “temporary differences” are and why do they arise?
Please take note of the following:
Firstly, There are THREE questions in this assignment.
Secondly, For questions that require journal entries, brief narrations should be given.
Thirdly, Round all figures to the nearest dollar (e.g., $50,000.51 should be rounded to $50,001).
Fourthly, Strictly follow the word limit indicated in the question if any. Any answer exceeding the word limit will NOT be marked.
Finally, The assignment must be typed and submitted online as a single Word file in your Canvas page for the ACCTG 311. Refer for the “Assignment submission instructions “at the end of the file on page 4.
QUESTION 1 [the question is adapted from 2019FC exam]
(a) Firstly, Explain what “temporary differences” are and why do they arise? [word limit: 100 words] (3 marks)
(b) Secondly, There are two methods to account for income tax expense: (i) the Taxes payable method, and (ii) the Interperiod tax allocation method.
Additionally, Explain the key difference between the Taxes payable method and the Interperiod tax allocation method, and why NZ IAS 12 adopts the Interperiod tax allocation method. [word limit: 150 words] (4 marks)
(a) Assume for the year ended 31 March 2020, Kindness Limited reports an accounting profit before tax of $1,000,000. This amount includes the following revenue and expense items in the Income Statement:
You have also been provided the following information:
· Accrued income: The amount of accrued income earned for the reporting period 31 March 2020 was $100,000. Accrued income is not taxable until cash is received.
· Insurance expense: On 1 April 2019 the balance of prepaid insurance was $50,000. During the year, $150,000 was paid for insurance. As at 31 March 2020, the balance of prepaid insurance was $80,000. Insurance expense is tax deductible when it is paid.
· Depreciation expense: Specialised machinery was acquired on 1 April 2017 at a cost of $400,000. The machinery has an economic life of 10 years with no residual value. For tax purposes, the machinery has an economic life of 5 years with no residual value. The straight-line method of depreciation is use d to depreciate the machinery for both accounting and tax purposes.
· Tax rate is 28%.
In accordance with NZ IAS 12, calculate the taxable profit and prepare journal entries to recognise the current tax payable for the year ended 31 March 2020. Show all workings. (5 marks)
(b) Sunny Limited purchased equipment on 1 April 2018 for $500,000. For accounting purposes, the equipment is depreciate d over 8 years on a straight line basis with no residual value. For tax purposes, the cost of the equipment is depreciated over 6 years using the straight line method. At the end of the financial year 31 March 2020, the equipment was revalued to $750,000. Sunny Limited intends to sell the equipment very soon. Any capital gain from sale is not subject to taxation in New Zealand. Additionally, Assume the tax rate is 28 percent.
In accordance with NZ IAS 12, provide the journal entries for the deferred tax adjustment arising from the equipment for the 2020 financial year. Show all workings.
QUESTION 3 [the question is adapted from 2019SC exam]
You are provided the information for the following asset/liability for the year ended 30 June 2019 for Decker Ltd. Assume the tax rate is 28 percent.
On the balance sheet, there is an investment of $300,000 in Government bonds, which pays interest at 5% per annum. For tax purposes, the interest income from these Government bonds is never taxable.
Rent revenue received in advance
The opening balance of the rent revenue received in advance was $50,000. During the year, Decker Ltd has received $100,000 cash with respect to rent revenue during the year. In the Income Statement, an amount of $120,000 was recognise as rent revenue this year. Finally, For tax purposes, the Inland Revenue taxes all rent received on a cash basis.
(a) Firstly,In accordance with NZ IAS 12, calculate the temporary difference arising from each of the above asset/liability. Show all workings. (4 marks)
(b) Secondly, Explain whether there is a deferred tax asset or deferred tax liability arising from each of the above asset/liability. Also calculate the amount of deferred tax asset/liability. [word limit: 160 words]
(Total for question: 8 marks)