Question

Part B: (10 Marks)

As at 31 March 2017, the balance of deferred tax account in the statement of financial position of Berry Limited was:

    Deferred tax asset                $16,000 (coming from tax losses carried forward)

   

For the year ended 31 March 2018, a tax loss of $40,000 was computed. All tax losses will be allowed to set off the future profits for tax purpose. As at year ended 31 March 2018, the management estimated the taxable profits for the forthcoming years as follows:

            2019                                     $50,000

            2020                                     $40,000

            2021 and beyond                 No estimation is available

The announced income tax rates for 2017, 2018 and thereafter was 20%.

At the end of 31 March 2019, the actual taxable profit reported in 2019 was $40,000.

At the same time, the management of the company revised their estimation about the future taxable profits as follows:

2020                                    $60,000

2021                                    $10,000

2022 and beyond                No estimation is available

As at 31 March 2019, the tax authority revised the tax rate to 17% for 2020 and thereafter.

Required:

Prepare the journal entries for the adjustments of the deferred tax asset for the year of 2018 and 2019. Show your workings.                                                                                          [10 marks]

Answer 1

WORKING: statement of profit or loss (in $)

	particulars	31.3.2018	31.3.2019
	profit(loss)	(40000)	50000
	less: Current tax	-	(2000)
	Deferred Tax : Tax effect of timing differences originating during the year(40000	8000	-
	Tax effect of timing difference reversed /adjusted during the year(40000*20%)		(8000)
	profit or loss after tax effect	(32000)	40000

JOURNAL ENTRIES (in $)

DATE	PARTICULARS	L.F	DEBIT	CREDIT
31.3.2019	profit & loss a/c Dr To provision for income tax a/c (being provision made for tax payable for current year)		2000	2000
31.3.19	deferred tax asset a/c Dr To profit &loss a/c (being deferred tax liability reduced on reversing timing difference)		8000	8000