# Assessed Loss Deferred Tax

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Objective Test

Deferred tax                            12 marks / 15 minutes

For all questions you may assume that the normal tax rate is 28%.

1)  Wax Tax owns a machine that has a carrying value of R30 000 and a tax base of R19 200.
Wax Tax accounts for equipment on the cost model.
(a) Is the temporary difference related to the machine a deductible or a
taxable temporary difference?
1 mark

(b) Calculate the deferred tax asset or liability related to the machine.
Indicate whether the amount is an asset or a liability.
1 mark

(c) If the tax rate changed to 26%, prepare the journal entry to adjust the deferred tax balance.

3 marks

2)   Shandler purchased a commercial building for R2 million that it depreciates over 20 years.
SARS does not grant wear and tear allowances on this building.
Before taking into account the building, Shandler has profit before tax of R600 000.
Except for the building, all other taxable income equals accounting profit.
Prepare Shandler's tax rate reconciliation.

4 marks

3)   Dandy, who accounts for it's machines on the revaluation model, has just revalued one of its
machines as follows:
dr        Machine (FP)                          225,000
cr        Gain on revaluation (OCI)                          225,000
Tax is yet to be accounted for. The machine has a residual value of zero, a tax base of
R400 000 and expected to be recovered through use.
Prepare the journal entry to account for any tax related to the revaluation.

3 marks
Objective Test

Deferred tax                           10 marks / 12 minutes

For all questions you may assume that the normal tax rate is 28%.

1)   VXC made an assessed loss and accounting loss of R450 000 in x1. It expects to make
a taxable profit in excess of R450 000 in x2.
In x2, VXC made a taxable and accounting profit of R375 000.

(a) Calculate VXC's current tax expense / income in x1 and x2. Indicate income or expense.
1 mark

(b) Calculate VXC's deferred tax expense / income in x1 and x2. Indicate income or expense.

2 marks

2)   Frumble purchased a car for R165 000 on 01/01/2010 and depreciates it over 5 years
and estimates that it will have a residual value of R40 000.
Frumble has other taxable income and accounting profit of R99 000 for its 31/12/2010 year end.
SARS grants wear and tear allowances of 33.33% per year on the car.
Prepare Frumble's statement of comprehensive income for the year ended 31/12/2010 in as
much detail as the question allows. Show how much tax is current tax and how much is deferred.

5 marks

3)   CubSnub used electricity to the value of R8 000 000 in December 2009.
CubSnub paid Eskom on 10/01/2010. The tax deduction can only be claimed when the R8 000 000
is actually paid. Calculate any deferred that CubSnub should include in its Statement of
Financial Position as at 31/12/2009. Indicate whether it is a deferred tax asset or liability.

2 marks
Objective Test
Solution
Deferred tax                            12 marks / 15 minutes

For all questions you may assume that the normal tax rate is 28%.
1)   Wax Tax owns a machine that has a carrying value of R30 000 and a tax base of R19 200.
Wax Tax accounts for equipment on the cost model.

(a) Is the temporary difference related to the machine a deductible or a
taxable temporary difference?
Taxable                                                     1 mark

(b) Calculate the deferred tax asset or liability related to the machine.
Indicate whether the amount is an asset or a liability.
CV          TB            TD          DT FP                                    1 mark
Machine        30,000         19,200     10,800            3,024 liability
(c) If the tax rate changed to 26%, prepare the journal entry to adjust the deferred tax balance.
CV          TB            TD          DT FP
@ 28%          30,000         19,200     10,800            3,024 liability
@ 26%          30,000         19,200     10,800            2,808 liability                      3 marks
Change                                                        216
dr DT FP                  216
cr DT P/L                                 216
2) Shandler purchased a commercial building for R2 million that it depreciates over 20 years.
SARS does not grant wear and tear allowances on this building.
Before taking into account the building, Shandler has profit before tax of R600 000.
Except for the building, all other taxable income equals accounting profit.
Prepare Shandler's tax rate reconciliation.
The building is exempt from deferred tax in terms of IAS 12.15
Tax rate reconciliation
Expected tax                            140,000 (600 000 - [2 000 000 ÷ 20]) x 28%
Dep on comm buildings                    28,000 (2 000 000 ÷ 20) x 28%                          4 marks
Actual tax                              168,000 (600 000 x 28%)

3)   Dandy, who accounts for it's machines on the revaluation model, has just revalued one of its
machines as follows:
dr       Machine (FP)                                 225,000
cr       Gain on revaluation (OCI)                                225,000
Tax is yet to be accounted for. The machine has a residual value of zero, a tax base of
R400 000 and expected to be recovered through use.
Prepare the journal entry to account for any tax related to the revaluation.

dr       DT (OCI)                                      63,000                      3 marks
cr       DT FP                                                    63,000
225 000 x 28%
Objective Test
Solution
Deferred tax                              10 marks / 12 minutes

For all questions you may assume that the normal tax rate is 28%.

1)   VXC made an assessed loss and accounting loss of R450 000 in x1 although it expects to make
a taxable profit in x2.
In x2, VXC made a taxable and accounting profit of R375 000.

(a) Calculate VXC's current tax expense / income in x1 and x2.
x1:            0                                                                    1 mark
x2:            0

(b) Calculate VXC's deferred tax expense / income in x1 and x2.
x1: 450 000 x 28%            = 126 000        income
x2: 375 000 x 28%            = 105 000        expense                               2 marks

2)   Frumble purchased a car for R165 000 on 01/01/2010 and depreciates it over 5 years
and estimates that it will have a residual value of R40 000.
Frumble has other taxable income and accounting profit of R99 000 for its 31/12/2010 year end.
SARS grants wear and tear allowances of 33.33% per year on the car.
Prepare Frumble's statement of comprehensive income for the year ended 31/12/2010 in as
much detail as the question allows. Show how much tax is current tax and how much is deferred.
CV           TB           TD         DT FP
Car            140,000     110,000         30,000       8,400 cr
           
 165 000 - [(165 000 - 40 000) ÷ 5]                165 000 x 2 ÷ 3
Statement of comprehensive income for the year ended 31/12/2010
Other profit                                                       99,000
Depreciation                                                      (25,000)
Net profit before tax                                              74,000
Tax expense                                                       (20,720)
Deferred tax expense                                                (8,400)
Current tax expense                                               (12,320) (99 000 - 55 000) x 28%
Profit after tax                                                   53,280

3)   CubSnub used electricity to the value of R8 000 000 in December 2009.
CubSnub paid Eskom on 10/01/2010. The tax deduction can only be claimed when the R8 000 000
is actually paid. Calculate any deferred that CubSnub should include in its Statement of
Financial Position as at 31/12/2009. Indicate whether it is a deferred tax asset or liability.

CV           TB           TD           DT FP
Accrued expense        (8,000,000)           0   (8,000,000)    2,240,000 Asset                      2 marks

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