Question 1

The balance sheet approach adopted in AASB 112:

Accepted Answer

A)  will continue to be used as the alternatives are too simplistic. 
B)  will only be understood by the very sophisticated financial readers. 
C)  uses existing statement of financial position data thus reducing record keeping costs. 
D)  will only be understood by the very sophisticated financial readers and uses existing statement of financial position data thus reducing record keeping costs. 
A)  will continue to be used as the alternatives are too simplistic. 
B)  will only be understood by the very sophisticated financial readers. 
C)  uses existing statement of financial position data thus reducing record keeping costs. 
D)  will only be understood by the very sophisticated financial readers and uses existing statement of financial position data thus reducing record keeping costs.

Question 2

Deferred tax assets may arise from amounts of income taxes recoverable in future periods that arise from carry forward of unused tax losses.

Accepted Answer

A) True 
 B)False

Question 3

Deferred tax assets are the amounts of income taxes recoverable in future periods that arise from assessable temporary differences.

Accepted Answer

A) True 
 B)False

Question 4

On 1 January 2012,William Bay Ltd purchased a machine for $100 000.The entity adopts a straight-line depreciation method and uses 10% and 15% as depreciation rate and tax rate respectively.The salvage value is zero and the tax rate is 30%. At 31 December 2012,which of the following statements is correct with respect to the transaction that is in accordance with AASB 112 Income Taxes only?

Accepted Answer

A)  There is a deductible temporary difference of $5000. 
B)  There is a deductible temporary difference of $1500. 
C)  There is a taxable temporary difference of $5000. 
D)  There is a taxable temporary difference of $1500. 
A)  There is a deductible temporary difference of $5000. 
B)  There is a deductible temporary difference of $1500. 
C)  There is a taxable temporary difference of $5000. 
D)  There is a taxable temporary difference of $1500.

Question 5

Some items are typically not allowable tax deductions but are recognised as an expense for accounting purposes.Which of the following items are of that type?

Accepted Answer

A)  research and development costs 
B)  warranty costs 
C)  sick leave payments 
D)  entertainment 
A)  research and development costs 
B)  warranty costs 
C)  sick leave payments 
D)  entertainment

Question 6

Bulldog Supplies Ltd has an item of equipment that has a carrying value of $80 000.For taxation purposes the asset's net value is $60 000 and deferred tax liabilities of $3000 had previously been recorded.Bulldog also has accrued interest revenue of $5000 that will not be taxed until it is received in cash.The tax rate is 30%.What is the journal entry to record the tax effect?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 4500 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 4500 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 4500 & \
\hline \mathrm { Cr } & \text { Income tax expense } & & \$ 4500 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 1500 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 15000 & \
\hline \mathrm { Cr } & \text { Income tax payable } & & \$ 15000 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 4500 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 4500 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 4500 & \
\hline \mathrm { Cr } & \text { Income tax expense } & & \$ 4500 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 1500 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 15000 & \
\hline \mathrm { Cr } & \text { Income tax payable } & & \$ 15000 \
\hline
\end{array}$$

Question 7

Spring Day Ltd has a piece of equipment that it has revalued to its fair value of $90 000 this period.It originally cost $80 000 and the accumulated depreciation for both accounting and tax purposes is $20 000.There is no intention to sell the equipment in the near future.The tax rate is 30%.What is the journal entry to reflect the revaluation's tax implications?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 9000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 9000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Asset revaluation reserve } & \$ 9000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 9000 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 9000 & \
\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & \$ 9000 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 3000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 3000 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 9000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 9000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Asset revaluation reserve } & \$ 9000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 9000 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Deferred tax asset } & \$ 9000 & \
\hline \mathrm { Cr } & \text { Asset revaluation reserve } & & \$ 9000 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 3000 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 3000 \
\hline
\end{array}$$

Question 8

The accounting profit multiplied by the tax rate is known as:

Accepted Answer

A)  income tax payable 
B)  income tax expense 
C)  taxable amount 
D)  assessable amount 
A)  income tax payable 
B)  income tax expense 
C)  taxable amount 
D)  assessable amount

Question 9

Snifful Industries has a depreciable asset that is estimated for accounting purposes to have a useful life of 7 years.For taxation purposes the useful life is 3 years.The asset was purchased at the beginning of year 1,there is no residual value,and the straight-line method of depreciation is used for both tax and accounting purposes.The tax rate is 30% and the cost of the asset is $210 000.What is the amount of the deferred tax liability account generated by this asset at the end of years 2,3 and 4?

Accepted Answer

A)  End of year 2: $24 000; year 3: $36 000; year 4: $27 000 
B)  End of year 2: $80 000; year 3: $120 000; year 4: $90 000 
C)  End of year 2: $12 000; year 3: $24 000; year 4: $36 000 
D)  End of year 2: $12 000; year 3: $12 000; year 4: $(9000) 
A)  End of year 2: $24 000; year 3: $36 000; year 4: $27 000 
B)  End of year 2: $80 000; year 3: $120 000; year 4: $90 000 
C)  End of year 2: $12 000; year 3: $24 000; year 4: $36 000 
D)  End of year 2: $12 000; year 3: $12 000; year 4: $(9000)

Question 10

Recognising deferred tax assets and deferred tax liabilities as per AASB 112 creates some conflict with the definition of assets and liabilities in the AASB Conceptual Framework.Key issues in this regard are:

Accepted Answer

A)  It is questionable whether or not the company controls the benefits from the deferred tax asset, and there is not a present obligation to transfer the funds represented in the deferred tax liability to the government. 
B)  The company really has no claim against the government for the amount of the deferred tax asset and it is not probable that the company will have to pay the deferred tax liability. 
C)  Setting off the deferred tax asset and deferred tax liability does not meet the requirements of the AASB Conceptual Framework and there is a contingent element involved in the recognition of the deferred tax asset. 
D)  The AASB Conceptual Framework does not permit the recognition of the rights to future revenues implicit in assets to trigger obligations to future expenses implicit in liabilities and the extent to which a deferred tax liability is recognised should not depend on management's intention to sell a revalued asset. 
A)  It is questionable whether or not the company controls the benefits from the deferred tax asset, and there is not a present obligation to transfer the funds represented in the deferred tax liability to the government. 
B)  The company really has no claim against the government for the amount of the deferred tax asset and it is not probable that the company will have to pay the deferred tax liability. 
C)  Setting off the deferred tax asset and deferred tax liability does not meet the requirements of the AASB Conceptual Framework and there is a contingent element involved in the recognition of the deferred tax asset. 
D)  The AASB Conceptual Framework does not permit the recognition of the rights to future revenues implicit in assets to trigger obligations to future expenses implicit in liabilities and the extent to which a deferred tax liability is recognised should not depend on management's intention to sell a revalued asset.

Question 11

When considering the recognition of assets and liabilities for tax purposes,reference is made to the:

Accepted Answer

A)  depreciation rate 
B)  carrying amount 
C)  tax base 
D)  historical cost 
A)  depreciation rate 
B)  carrying amount 
C)  tax base 
D)  historical cost

Question 12

Non-deductible expenses in the current or subsequent periods results in a deferred tax asset.

Accepted Answer

A) True 
 B)False

Question 13

The tax figure calculated and recorded on the statement of comprehensive income is an accurate reflection of the entity's tax liability for the stated period.

Accepted Answer

A) True 
 B)False

Question 14

The correct method for calculating the amount of a deferred tax liability or asset may be expressed as a formula as follows:

Accepted Answer

A)  (Carrying amount of assets or liabilities - tax bases of assets or liabilities) × tax rate 
B)  Carrying amount of assets or liabilities - (tax bases of assets or liabilities × tax rate) 
C)  Carrying amount of assets or liabilities - tax bases of assets or liabilities × tax rate 
D)  Carrying amount of assets or liabilities - tax bases of assets or liabilities 
A)  (Carrying amount of assets or liabilities - tax bases of assets or liabilities) × tax rate 
B)  Carrying amount of assets or liabilities - (tax bases of assets or liabilities × tax rate) 
C)  Carrying amount of assets or liabilities - tax bases of assets or liabilities × tax rate 
D)  Carrying amount of assets or liabilities - tax bases of assets or liabilities

Question 15

Sinfonia Ltd made credit sales for this period of $100 000.The allowance for doubtful debts for these sales is $3000.For taxation purposes the amount provided for doubtful debts is not tax-deductible and the taxation office has included the $100 000 in taxable income.The tax rate is 30%.What is the deferral arising from this situation?

Accepted Answer

A)  none 
B)  deferred tax liability of $900 
C)  deferred tax asset of $900 
D)  deferred tax liability of $3000 
A)  none 
B)  deferred tax liability of $900 
C)  deferred tax asset of $900 
D)  deferred tax liability of $3000

Question 16

What is the accounting treatment for goodwill that is consistent with AASB 112 Income Taxes?

Accepted Answer

A)  treated as a deductible expense in the year of recognition 
B)  treated as a non-deductible expense in the year of recognition and subsequent periods 
C)  the difference between the carrying amount and the tax base results to a taxable temporary difference 
D)  the difference between the carrying amount and the tax base results to a deductible temporary difference 
A)  treated as a deductible expense in the year of recognition 
B)  treated as a non-deductible expense in the year of recognition and subsequent periods 
C)  the difference between the carrying amount and the tax base results to a taxable temporary difference 
D)  the difference between the carrying amount and the tax base results to a deductible temporary difference

Question 17

A company has a loan with a carrying value of $60 000.The payment of the loan is not deductible for tax purposes.The tax rate is 30%.What is the tax base for this item?

Accepted Answer

A)  $0 
B)  $60 000 
C)  $18 000 
D)  $78 000 
A)  $0 
B)  $60 000 
C)  $18 000 
D)  $78 000

Question 18

Evaluate deferred tax assets and deferred tax liabilities in terms of the AASB Conceptual Framework and the notion that they fail to meet the criteria outlined in the Framework.

Accepted Answer

Consider whether the asset 'deferred tax

Question 19

Mighty Motors Ltd offers a warranty on all the spare parts it sells.This period the accrued warranty is $5000.For tax purposes there is no deduction for the warranty until payments are made.Mighty Motors also has equipment that has a useful life for accounting purposes of 4 years and for tax purposes 3 years.The equipment was purchased at the beginning of the current period,cost $9000 and has no residual value.The straight-line method of depreciation is used for both accounting and tax purposes.The accounting profit before tax this period is $80 000.The tax rate is 30%.What are the journal entries to record the tax expense and tax payable?

Accepted Answer

A) 
$\begin{array}{l}
\begin{array}{|c|l|r|r|}
\hline \text { Dr } & \text { Deferred tax asset } & \$ 1500 & \
\hline \mathrm{Cr} & \text { Income tax expense } & & {\$ 1500} \
\hline
\end{array}\\
\begin{array}{|c|l|r|r|}
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 225 & \
\hline \mathrm{Cr} & \text { Deferred tax liability } & & \$ 225 \
\hline
\end{array}\\
\begin{array}{|l|l|r|r|}
\hline \text { Dr } & \text { Income tax expense } & \$ 25275 & \
\hline \mathrm{Cr} & \text { Tax payable } & & \$ 25275 \
\hline
\end{array}
\end{array}$ 
B) 
$\begin{array}{|c|l|r|r|}
\hline \text { Dr } & \text { Deferred tax asset } & \$ 225 & \
\hline \mathrm{Cr} & \text { Income tax expense } & & {\$ 225} \
\hline & & \
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm{Cr} & \text { Deferred tax liability } & & \$ 1500 \
\hline & &  \
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 24000 & \
\hline \mathrm{Cr} & \text { Tax payable } & & \$ 24000 \
\hline
\end{array}$ 
C) 
$\begin{array}{|c|l|r|r|}
\hline \text { Dr } & \text { Deferred tax asset } & \$ 5000 & \
\hline \mathrm{Cr} & \text { Income tax expense } & & {\$ 5000} \
\hline & &\
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 750 & \
\hline \mathrm{Cr} & \text { Deferred tax liability } & & \$ 750 \
\hline & & & \
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 25275 & \
\hline \mathrm{Cr} & \text { Tax payable } & & \$ 25275 \
\hline
\end{array}$ 
D) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Deferred tax asset } & & \$ 1500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 225 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 225 \
\hline & & & \
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 24000 & \
\hline \mathrm { Cr } & \text { Tax payable } & & \$ 24000 \
\hline
\end{array}$$ 
A) 
$\begin{array}{l}
\begin{array}{|c|l|r|r|}
\hline \text { Dr } & \text { Deferred tax asset } & \$ 1500 & \
\hline \mathrm{Cr} & \text { Income tax expense } & & {\$ 1500} \
\hline
\end{array}\\
\begin{array}{|c|l|r|r|}
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 225 & \
\hline \mathrm{Cr} & \text { Deferred tax liability } & & \$ 225 \
\hline
\end{array}\\
\begin{array}{|l|l|r|r|}
\hline \text { Dr } & \text { Income tax expense } & \$ 25275 & \
\hline \mathrm{Cr} & \text { Tax payable } & & \$ 25275 \
\hline
\end{array}
\end{array}$ 
B) 
$\begin{array}{|c|l|r|r|}
\hline \text { Dr } & \text { Deferred tax asset } & \$ 225 & \
\hline \mathrm{Cr} & \text { Income tax expense } & & {\$ 225} \
\hline & & \
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm{Cr} & \text { Deferred tax liability } & & \$ 1500 \
\hline & &  \
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 24000 & \
\hline \mathrm{Cr} & \text { Tax payable } & & \$ 24000 \
\hline
\end{array}$ 
C) 
$\begin{array}{|c|l|r|r|}
\hline \text { Dr } & \text { Deferred tax asset } & \$ 5000 & \
\hline \mathrm{Cr} & \text { Income tax expense } & & {\$ 5000} \
\hline & &\
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 750 & \
\hline \mathrm{Cr} & \text { Deferred tax liability } & & \$ 750 \
\hline & & & \
\hline \mathrm{Dr} & \text { Income tax expense } & \$ 25275 & \
\hline \mathrm{Cr} & \text { Tax payable } & & \$ 25275 \
\hline
\end{array}$ 
D) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 1500 & \
\hline \mathrm { Cr } & \text { Deferred tax asset } & & \$ 1500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 225 & \
\hline \mathrm { Cr } & \text { Deferred tax liability } & & \$ 225 \
\hline & & & \
\hline \mathrm { Dr } & \text { Income tax expense } & \$ 24000 & \
\hline \mathrm { Cr } & \text { Tax payable } & & \$ 24000 \
\hline
\end{array}$$

Question 20

The carrying amount of a deferred tax asset is reviewed:

Accepted Answer

A)  annually 
B)  at each reporting date 
C)  when assets are revalued 
D)  None of the given answers are correct. 
A)  annually 
B)  at each reporting date 
C)  when assets are revalued 
D)  None of the given answers are correct.

Exam 18: Accounting for Income Taxes

The balance sheet approach adopted in AASB 112:

Deferred tax assets may arise from amounts of income taxes recoverable in future periods that arise from carry forward of unused tax losses.

Deferred tax assets are the amounts of income taxes recoverable in future periods that arise from assessable temporary differences.

Some items are typically not allowable tax deductions but are recognised as an expense for accounting purposes.Which of the following items are of that type?

The accounting profit multiplied by the tax rate is known as:

Recognising deferred tax assets and deferred tax liabilities as per AASB 112 creates some conflict with the definition of assets and liabilities in the AASB Conceptual Framework.Key issues in this regard are:

When considering the recognition of assets and liabilities for tax purposes,reference is made to the:

Non-deductible expenses in the current or subsequent periods results in a deferred tax asset.

The tax figure calculated and recorded on the statement of comprehensive income is an accurate reflection of the entity's tax liability for the stated period.

The correct method for calculating the amount of a deferred tax liability or asset may be expressed as a formula as follows:

What is the accounting treatment for goodwill that is consistent with AASB 112 Income Taxes?

A company has a loan with a carrying value of $60 000.The payment of the loan is not deductible for tax purposes.The tax rate is 30%.What is the tax base for this item?

Evaluate deferred tax assets and deferred tax liabilities in terms of the AASB Conceptual Framework and the notion that they fail to meet the criteria outlined in the Framework.

The carrying amount of a deferred tax asset is reviewed:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Accounting

An Overview of Accounting for Assets

Depreciation of Property, plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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