Answer:
Jaguar Ltd
Profit before tax = $600,000
Add non-allowed expenses for 2017:
Entertainment expense $60,000
Unpaid salary expense $80,000 140,000
Less
Depreciation (difference) 32,000
Unreceived interest 70,000 102,000
a) Adjusted taxable profit $638,000
a) Tax Payable 30% * $638,000 191,400
b) Computation of Deferred tax liability:
Depreciation $32,000
Unreceived interest $70,000
Total $102,000
30% * $102,000
= $30,600
Computation of Deferred tax asset:
Unpaid salary expense $80,000
30% * $80,000
= $24,000
c) Journal entries on 30 June 2017:
Debit Income Tax Expense $191,400
Credit Income Tax Payable $191,400
To record the tax expense for the year.
Debit Deferred Tax Asset $24,000
Credit Income Tax Expense $24,000
To create deferred tax asset on deductible expense.
Debit Income Tax Expense $30,600
Credit Deferred Tax Liability $30,600
To create deferred tax liability on deferred income.
Explanation:
a) Data and Calculations:
July 1 2016 Equipment purchased = $640,000
Useful life = 5 years
Depreciation basis = straight-line
Depreciable amount = $640,000/5 = $128,000
ATO Useful life = 4 years
Depreciable amount under ATO = $640,000/4 = $160,000
Profit before tax = $600,000
Add non-allowed expenses for 2017:
Entertainment expense $60,000
Unpaid salary expense $80,000 140,000
Less
Depreciation (difference) 32,000
Unreceived interest 70,000 102,000
a) Adjusted taxable profit $638,000
a) Tax Payable 30% * $638,000 191,400
b) Computation of Deferred tax liability:
Temporary Differences:
Depreciation $32,000
Unreceived interest $70,000
Total $102,000
30% * $102,000
= $30,600
Computation of Deferred tax asset:
Deductible expense:
Unpaid salary expense $80,000
30% * $80,000
= $24,000
Deferred Tax Liability and Deferred Tax Asset arise from temporary timing differences between the generally accepted accounting principles based taxable profit and the tax act based taxable profit. An example, is the unpaid salary expense that is not allowed by tax law because it has not been paid for. When it is eventually paid, the expense becomes deductible. While the tax authorities will charge more tax as a result, the company will create a deferred tax asset for this non-allowed expense.
