Differences between tax rules and accounting rules

Response to the following problem:

Boiling Pot Limited commences operations on 1 July 2014. One year after the commencement of its operations (30 June 2015) the entity prepares the following information, showing both the carrying amounts for accounting purposes and the tax bases of the respective assets and liabilities.

Other information

• After adjusting for differences between tax rules and accounting rules, it is determined that the taxable income of Boiling Pot Limited is $700 000.

• There is an allowance for doubtful debts of $10 000.

• An item of plant is purchased at a cost of $600 000 on 1 July 2014. For accounting purposes it is expected to have a life of four years; however, for taxation purposes it can be depreciated over three years. It is not expected to have any residual value.

• Boiling Pot Limited has some land, which cost $400 000 and which has been revalued to its fair value of $600 000 in accordance with AASB 116.

• None of the amounts accrued in respect of warranty expenses or long-service leave has actually been paid.

• The tax rate is 30 per cent.

REQUIRED Prepare the year-end journal entries to account for tax using the balance sheet method.

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Taxation: Differences between tax rules and accounting rules
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