illustration of accounting treatment of deferred

Question

Illustration of Accounting treatment of deferred tax

A Ltd., bought an item of plant at a cost of £100,000 in year 2000. The estimated useful life of the plant was 5 years and depreciation is on a straight line basis with no residual value. The company makes profits before tax of £200,000 and the corporation tax rate is 30%.  The item of plant has the following:

Year    1    2    3    4    5
Rate    30%    25%    20%    15%    10%

Required: (for each of the five years)

i) Tax liability (corporation)
ii) Carrying amount, tax base, taxable temporary difference of the plant and the balance carried down on deferred tax account.
iii)    The deferred tax account
iv)    Final accounts extracts (Profit and loss + balance sheet)
Assume that the corporation tax liability is unpaid by the year end.

Corporation tax liability

 

	2000	2001	2002	2003	2004
	£	£	£	£	£
Profit before tax	200,000	200,000	200,000	200,000	200,000
Add back depreciation	20,000	20,000	20,000	20,000	20,000
	220,000	220,000	220,000	220,000	220,000
Less capital allowances	(30,000)	(25,000)	(20,000)	(15,000)	(10,000)
Taxable profits	190,000	195,000	200,000	205,000	210,000
Taxable liability  (30%)	(57,000)	(56,500)	(60,000)	(61,500)	(63,000)
	133,000	136,500	140,000	143,5000	147,000

 

 

Carrying amount, tax base, and taxable temp diff.

 

	2000	2001	2002	2003	2004
	£ ‘000’	£ ‘000’	£ ‘000’	£ ‘000’	£ ‘000’
Carrying amount:  Cost	100	100	100	100	100
Accumulated depreciation	20	40	60	80	100
	80	60	40	20	-
Tax box:  Cost	100	100	100	100	100
Accumulated capital all	(30)	(55)	(75)	(90)	(100)
	70	45	25	10	-
Taxable temp. difference	10	15	15	10	-
Bal c/d on deferred tax a/c (30%)	3	45	45	3	-

 

 

Deferred Tax Account
		£ ‘000’			£ ‘000’
31/12/00	Bal c/d	3	31/12/00	P & L (bal. fig)	3
31/12/01	Bal c/d	4.5	1/1/01	Bal b/d	3
			31/12/01	P & L (bal. fig)	1.5
		4.5			4.5
31/12/02	Bal c/d	4.5	1/1/02	Bal b/d	4.5
31/12/03	P & L (Bal. fig)	4.5	1/1/03	Bal b/d	4.5
31/12/03	Bal c/d	1.5
		3
		4.5			4.5
		3	1/1/04	Bal b/d	3

 

Final accounts extracts

 

Income statement

 

	2000	2001	2002	2003	2004
	£ ‘000’	£ ‘000’	£ ‘000’	£ ‘000’	£ ‘000’
Profit before tax	200	200	200	200	200
Income tax	60	60	60	60	60
Profit for the period	140	140	140	140	140

 

 

Workings:  Income tax expense

 

Current year estimated corporation tax liability	57	58.5	60	61.5	63
Add/(less) transfer to/(from) deferred tax a/c	3	1.5	-	(1.5)	(3)
	60	60.0	60	60	60

 

Balance Sheet

 

NON-CURRENT LIABILITIES
Deferred tax	3	4.5	4.5	3	-
CURRENT LIABILITIES
Current tax	57	58.5	60	61.5	63