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FEEDBACK TUTORIAL LETTER 

 

 

ASSIGNMENT 1 

 

 

SECOND SEMESTER 2017 

 

 

 

FINANCIAL ACCOUNTING 202 

                                     [FAC612S]

 

   

Feedback on Tutorial Letter 1- Semester 2: FAC 612 S

Question 1:

Current Tax and Deferred Taxation workings and disclosures

This question was answered well, with very few errors made.

Students need to be clear to distinguish between permanent and temporary differences when

preparing the current tax computation. Not distinguishing between the two does not demonstrate

an understanding with what is permanent and what is temporary in nature- and as such will not be

tolerated in examinations and could lead to penalisation.

Question 2:

Journal entries on taxation and computation of current tax

Well answered. Some students indicated a journal for every expense and income for the year- which

was not required, as only TAXATION journals were required.

Question 3:

This section was extremely well done. Provisions per IAS 37 journal were well answered.

The theory was also well attempted.

NOTE: Plagiarism remains a serious academic crime, and will not be tolerated – be warned.

Question 1 (30 Marks)

a) Calculation of Current income tax and deferred Income Tax

Working 1 2,016 2,015 2,014

Profit before tax -20,000 -10,000 10,000 a

Exempt Income -20,000 -20,000 -20,000 a

Assessed Tax loss brought forward -140,000 -110,000 -100,000 a

Taxable Income/(Tax loss) -180,000 -140,000 -110,000

1/2 each 6 marks

Current Income Tax - -

Calculation of deferred income tax

Working 2

CA TB TD DT

Balance 1 January 2014 - 100,000 100,000 30,000 DTA

Movement 3,000 a

Balance 31 December 2014 - 110,000 110,000 33,000 DTA

Movement 9,000 a

Balance 31 December 2015 - 140,000 140,000 42,000 DTA

Movement 12,000 a

Balance 31 December 2016 - 180,000 180,000 54,000 DTA

2 marks each 6 marks

Income Tax Expense 2,016 2,015 2,014

Current tax - - - a

Deferred Tax

Current Year movment in temp differences -12,000 -9,000 -3,000 a

Current year DTA not recognised 9,000 - a

Prior year DTA written-down/(back) -33,000 33,000 a

Prior year unrecognised DTA now recognised -9,000 - - a

Tax expense per statement of comprehensive income-54,000 33,000 -3,000

5 marks

Tax reconciliation

Applicable tax rate 30% 30% 30%

Tax effects of:

Profit before taxtaion

(2016:20 000*30%; 2015:10 000*30%; 2014: 10 000*30%)-6,000 -3,000 3,000 3

Exempt dividend income -6,000 -6,000 -6,000 3

Current tear deferred tax asset not recognised - 9,000 - 1

Prior year DTA written down -33,000 33,000 - 2

Prior year unrecognised DTA recognised -9,000 - - 1

-54,000 33,000 -3,000

10 marks

Effective tax rate (tax expense/Profit before tax)*100-270% 330% -30%

Deffered Income tax asset

The deferred tax balance comprises tax on following types of temporary differences:

Tax loss 54,000 - 33,000

30 MARKS 3 marks

Question 2

Journals Debit Credit

2014

Current tax payable (SOFP) 60,000 a

Bank (SOFP) 60,000 a

Provisional tax payments (2 provisional payments total)

Income tax expense (p/l) 99,000 a

Current tax payable 99,000 a

Provisional tax payments (2 provisional payments total)

2015

Current tax payable: (SOFP) 70,000 a

Bank (SOFP) - 70,000 a

Income tax expense (SOCI: P/L) 111,000 a

Current tax payable: income tax (SOFP: current liability)111,000 a

Current income tax estimated for 20X2 (see working 1)

Current tax payable: income tax (SOFP: current liability)5,000 a

Income tax expense (SOCI: P/L) 5,000 a

Current income tax over-estimated in 20X1 (see working 2)

2016

Current tax payable: income tax (SOFP: current liability)100,000 a

Bank (SOFP: current asset) 100,000 a

Income tax expense (SOCI: P/L) 153,000 a

Current tax payable: income tax (SOFP: current liability)153,000 a

Current income tax estimated for 20X3 (see working 1)

Income tax expense (SOCI: P/L) 3,500 a

Current tax payable: income tax (SOFP: current liability)3,500 a

Current income tax under-estimated in 20X2 (see working 2)

16 Marks

Calculation of current income tax 2,014 2,015 2,016

Profit before tax 300,000 400,000 450,000 a

Permanent differences

Add: donations 40,000 - -

340,000 400,000 450,000

temporary Differences -10,000 -30,000 60,000

Less; profit on sale of vehicles -30,000

Add: recoupment on sale of vehicle 30,000

Less: Profit on sale of machine -30,000

Add: recoupment on sale of machine 50,000

20,000 10,000 40,000

- -20,000 -10,000

-30,000 -40,000 -20,000

- 30,000 40,000

Add; depreciation - 15,000 15,000

Less: wear and tear - -25,000 -25,000

Taxable profits 330,000 370,000 510,000

(1 marks each) 24 Marks

30% 30% 30%

2,016 2,015 2,014

99,000 111,000 153,000

Current income tax estimated (W1)

Current income tax assessed (Given) 99,000 111,000 153,000

(Over-provision) / Under-provision 94,000 114,500 not yet assessed

5,000 3,500 unknown

Assessme

nt

received

in 2015,

thus

journalise

d in: 2015

Assessmen

t received

in 2016,

thus

journalised

in: 2016

Provisional tax payments (this is the total of the 2 provisional payments - these would

normally each be journalised separately)

add: Income received in advance

c/balance

less: Income received in advance

o/balance

Less: Expenses prepaid: c/balance

Add: expeneses prepaid:

o/balance

W2: Calculation of over/ under

provision of current income tax

Question 3 Debit Credit

01/10/2015

Plant & machinery: cost (A) 1,000,000 a

Bank 1,000,000 a

(Purchase price)

10-12/2015

Plant & machinery: cost (A) 175,480 a

Bank 175,480 a

(Installation costs)

01/01/2016

Plant & machinery: decommissioning: cost (A)74,520 a

Provision for decommissioning liability 74,520 a

(PV of future decommissioning costs)

31/12/2016

Finance costs 7,440 a

Provision for decommissioning liability 7,440 a

(Unwinding of PV of decommissioning liability)

(81 960 – 74 520)

Depreciation: plant & machinery 250,000 a

Plant & machinery: accumulated depreciation 235,096 a

Plant & machinery: accumulated depreciation - decommissioning14,904 a

(1 175 480 / 5); (74 520 / 5)

11 Marks

Please note: the accumulated depreciation of each of these two parts – the physical

plant & machinery

Issue

Definitions

a

a

a

a

a

a

Discussion

a

a

a

a

a

a

aa

Note to student:

(14 Marks)

required to settle the obligation (the payment of the decommissioning costs in the

future); and

estimated at C120 000).This provision must be capitalised to the cost of the plant and machinery. This is because

assets are measured at cost, and one of the components of cost is future

decommissioning costs. IAS 16.16(c)

IAS 37 defines a provision as a liability of uncertain timing or amount. IAS 37.10 Thus it is

necessary to firstly determine whether or not there is a liability. The Conceptual

framework defines a liability as:

In determining whether or not a present obligation exists, IAS 37 provides further

guidance in stating that a present obligation may be a legal or a constructive obligation.

A legal obligation is an obligation that derives from:

The issue is to determine whether or not to recognise a provision in respect of the

future decommissioning costs.

The licence granted allows the operation of the plant and machinery but includes a

clause that requires the entity to dismantle the plant and machinery, and restore the

area in the future. There is therefore a legal obligation for the costs associated with the

future dismantling and restoration.A past event that leads to a present obligation is called an obligating event. The

obligating event is the installation of the plant and machinery in terms of this licence and

thus there is a legal obligation present at year-end.

Decommissioning and dismantling are two terms that are frequently used in the

accounting world to refer essentially to the same thing. Strictly speaking,

‘decommissioning’ refers to taking an asset (e.g. machine or plant) out of operation

whereas ‘dismantling’ refers to the ‘taking apart’ of an asset

A provision for future decommissioning costs must be recognised since there is:

terms of the licence; and