A company commenced business on 1 July 2022. On 30 June 2023, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: AssetsLiabilitiesCash$20,000Accounts Payables$50,000Inventories60,000Provision for annual Leave8,000Plant200,000 Accumulated Depreciation(20,000) Additional information: The plant was acquired on 1 July 2022. Depreciation for accounting purposes was 10% (straight-line method), while 20% (straight-line) was used for tax purposes. The tax rate is 30%.The deferred tax liability and deferred tax asset are:Group of answer choicesDTL = $2,400 and DTA = $6,000DTL = $20,000 and DTA = $8,000DTL = $8,000 and DTA = $20,000DTL = $6,000 and DTA = $2,400
Question
A company commenced business on 1 July 2022. On 30 June 2023, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: AssetsLiabilitiesCash50,000Inventories60,000Provision for annual Leave8,000Plant200,000 Accumulated Depreciation(20,000) Additional information: The plant was acquired on 1 July 2022. Depreciation for accounting purposes was 10% (straight-line method), while 20% (straight-line) was used for tax purposes. The tax rate is 30%.The deferred tax liability and deferred tax asset are:Group of answer choicesDTL = 6,000DTL = 8,000DTL = 20,000DTL = 2,400
Solution
Step 1: Read the question and identify the key points.
Step 2: Analyze the question and determine what information is provided and what is being asked.
Step 3: Calculate the temporary difference between the accounting and tax bases of the plant.
Step 4: Determine the deferred tax liability and deferred tax asset.
Step 5: Choose the correct option based on the calculation.
Step 6: Explain the calculation and conclude your answer.
Step 1: The question provides information about the assets and liabilities of a company, as well as additional information about the plant, depreciation, and tax rate. The question asks for the deferred tax liability and deferred tax asset of the company.
Step 2: The information provided includes the assets and liabilities of the company, as well as the accounting and tax depreciation rates for the plant and the tax rate. The question asks for the deferred tax liability and deferred tax asset of the company.
Step 3: The accounting depreciation for the plant is 2,000, while the tax depreciation is 4,000. The temporary difference is 4,000 = -$2,000, which represents a deductible temporary difference.
Step 4: The deferred tax liability and deferred tax asset can be calculated by multiplying the temporary difference by the tax rate of 30%. The deferred tax liability is 2,000 x 30%), while the deferred tax asset is also 2,000 x 30%).
Step 5: The correct option is DTL = 600.
Step 6: In conclusion, the deferred tax liability and deferred tax asset of the company are DTL = 600, respectively. This is based on the calculation of the temporary difference between the accounting and tax bases of the plant, which is a deductible temporary difference. The deferred tax liability and deferred tax asset are both equal to $600, which is calculated by multiplying the temporary difference by the tax rate of 30%.
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