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