Deck 23: Revenue From Contracts With Customers

Question 1

The following information relates to Godfrey Limited for the year ended 30 June 2016: Accounting profit before income tax (after all expenses have been included) $\quad$ $£ 300,000$
Fines and penalties (not tax deductible) $\quad$ 20,000
Depreciation of plant (accounting) $\quad$ 40,000
Depreciation of plant (tax) $\quad$ 100,000
Long-service leave expense (not a tax deduction until the leave is paid) $\quad$ 8,000
Income tax rate $\quad$$30 \%$
On the basis of this information the current tax liability is:

A) £74 400;
B) £78 000;
C) £80 400;
D) £99 600.

Answer 1

£80 400;

Question 2

Balchin Limited had the following deferred tax balances at reporting date:
$\bullet$ Deferred tax assets €12 000
$\bullet$ Deferred tax liabilities €30 000
Effective from the first day of the next financial period, the company rate of income tax was reduced from 40% to 30%. The adjustment to income tax expense to recognise the impact of the tax rate change is:

A) DR €6000;
B) DR €4500;
C) CR €6000;
D) CR €4500.

Answer 2

CR €4500.

Question 3

On 1 April 2015, the company rate of income tax was changed from 35% to 30%. At the previous reporting date (30 June 2014) Montgomery Limited had the following tax balances:
$\bullet$ Deferred tax assets $26 250
$\bullet$ Deferred tax liabilities $21 000
What is the impact of the tax rate change on income tax expense?

A) increase $750;
B) decrease $750;
C) increase $875;
D) decrease $875.

Answer 3

increase $750;

Question 4

Differences between the carrying amounts of an entity's net assets determined under accounting standards, and the tax bases of those net assets, are described as:

A) temporary differences;
B) permanent differences;
C) tax losses;
D) the current income tax liability.

Question 5

Unless a company has a legal right of set-off, IAS 12 Income Taxes, requires disclosure of all of the following information for deferred tax in the statement of financial position:
I The amount of deferred tax assets recognised
II The amount of the deferred tax liabilities recognised
III The net amount of the deferred tax assets and liabilities recognised
IV The amount of the deferred tax asset relating to tax losses

A) I, II and IV only;
B) I, II and III only;
C) III and IV only;
D) IV only.

Question 6

A deductible temporary difference is expected to lead to the payment of:

A) more tax in the future and gives rise to a deferred tax asset;
B) less tax in the future and gives rise to a deferred tax asset;
C) more tax in the future and gives rise to a deferred tax liability;
D) less tax in the future and gives rise to a deferred tax liability.

Question 7

Generally, when considering the differences between the accounting treatment and the income tax treatment of a particular item the accounting treatment is based on:

A) cash flows;
B) cash flows adjusted for depreciation charges;
C) accrual accounting and is subject to the requirements of accounting standards;
D) the income tax legislation.

Question 8

A taxable temporary difference is expected to lead to the payment of:

A) more tax in the future and gives rise to a deferred tax asset;
B) less tax in the future and gives rise to a deferred tax asset;
C) more tax in the future and gives rise to a deferred tax liability;
D) less tax in the future and gives rise to a deferred tax liability.

Question 9

During the year ended 30 June 2015 Barry Ltd, pays quarterly tax instalments as follows: €4000 on 28 October 2014
€11 000 on 28 February 2015
€12 000 on 28 April 2015
On 30 June 2015, Barry Ltd determines its total current tax liability for the year to be €33 000.
The final tax instalment for the year will be:

A) a refund of €2000;
B) a payment of €6000;
C) a payment of €12 000;
D) a payment of €33 000.

Question 10

Under IAS 12 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that:

A) applied at the beginning of the reporting period;
B) at the end of the reporting period;
C) at the rates that prevail at the reporting date;
D) are expected to apply when the asset is realised or the liability is settled.

Question 11

The following information was extracted from the financial records of Pamakari Limited: Equipment purchased on 1 July 2015 for $100 000 (accounting depreciation 10% straight line tax depreciation 20% straight line). If the company tax rate is 30%, the deferred tax item that will be recorded by Pamakari Limited at 30 June 2016 is:

A) debit Deferred tax asset $3000;
B) credit Deferred tax asset $3000;
C) debit Deferred tax liability $3000;
D) credit Deferred tax liability $3000.

Question 12

Use the information below to answer questions
A company commenced business on 1 July 2014. On 30 June 2015, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: $\begin{array}{lllr}\text { Assets } & &{\text { Liabilities }} \\\text { Cash } & £ 40,000 & \text { Trade payables } & £ 80,000 \\\text { Inventory } & 100,000 & \text { Long service leave } & 5,000\\\text { Plant } & 300,000 \\\text { Accumulated depreciation } & (30,000)\end{array}$
Additional information:

1. The plant was acquired on 1 July 2014. Depreciation for accounting purposes was 10% (straight-line method), while 15% (straight-line) was used for tax purposes.

2. The tax rate is 30%.

Using the following worksheet, determine the deferred tax asset and deferred tax liability.
$\begin{array}{|c|c|c|c|c|c|c|}\hline &\begin{array}{c}\text { Carrying } \\\text { amount }\end{array} & \begin{array}{c}\text { Future } \\\text { taxable } \\\text { amount }\end{array} & \begin{array}{c}\text { Future } \\\text { deductibl } \\\text { e amount }\end{array} & \begin{array}{c}\text { Taxable } \\\text { base }\end{array} & \begin{array}{c}\text { Deductible } \\\text { temporary } \\\text { differences }\end{array} & \begin{array}{c}\text { temporary } \\\text { differences }\end{array} \\\hline \text { Assets } & \\\hline \text { Cash } & \\\hline \text { Inventory } & \\\hline \text { Plant } & \\\hline & \\\hline \text { Liabilities } & \\\hline \text { Trade payables } & \\\hline \begin{array}{c}\text { Long-service } \\\text { leave }\end{array} & \\\hline & \\\hline & \\\hline \text { Deferred tax liability } & \\\hline \text { Deferred tax asset } & \\\hline\end{array}$

-The deferred tax liability is:

A) £1500;
B) £4500;
C) £15 000;
D) £34 500.

Question 13

At what point in time are deferred tax accounting adjustments recorded?

A) As each transaction arises or is incurred;
B) As the cash flows from each transaction occur;
C) At the end of each month;
D) At the reporting date.

Question 14

CTT Limited has an asset which cost $300 with related accumulated depreciation of $100. The accumulated depreciation for tax purposes is $180 and the company tax rate is 30%. The tax base of this asset is:

A) $120;
B) $220;
C) $80;
D) $20.

Question 15

Malarky Limited accrued €30 000 for employees' long service leave in the year ended 30 June 2016. This item will not be tax deductible until it is paid in approximately 10 years' time. If the company tax rate is 30%, Malarky Limited must record the following tax effect adjustment at the reporting date:

A) debit Deferred tax asset €9000;
B) debit Deferred tax liability €9000;
C) credit Deferred tax asset €9000;
D) credit Deferred tax liability €9000.
Use the information below to answer questions 12 and 13.
A company commenced business on 1 July 2014. On 30 June 2015, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information:
Assets Liabilities
Cash £40 000 Trade payables £80 000
Inventory 100 000 Long service leave 5 000
Plant 300 000
Accumulated depreciation (30 000)
Additional information:

Question 16

Tax losses can be viewed as providing:

A) taxable temporary differences, and therefore a current tax liability;
B) taxable temporary differences, and therefore a current tax refund;
C) deductible temporary differences, and therefore a deferred tax asset;
D) deductible temporary differences, and therefore deferred tax liabilities.

Question 17

In jurisdictions where the impairment of goodwill is not tax deductible, IAS 12 Income Taxes:

A) does not permit the application of deferred tax accounting to goodwill;
B) allows the recognition of a deferred tax item in relation to goodwill;
C) requires that any deferred tax items in relation to goodwill be recognised directly in equity;
D) requires that any deferred tax items for goodwill be capitalised in the carrying amount of goodwill.

Question 18

The tax expense related to profit or loss of the period is required to be presented:

A) on the face of the statement of financial position;
B) on the face of the statement of profit or loss and other comprehensive income;
C) in the statement of cash flows;
D) in the statement of changes in equity.

Question 19

D'Silva Limited has a product warranty liability amounting to $10 000. The product warranty costs are not tax deductible until paid out to customers. The company tax rate is 30%. The company has:

A) a deductible temporary difference of $10 000;
B) an taxable temporary difference of $10 000;
C) a tax base of $10 000;
D) a future deductible amount of $0.

Question 20

Use the information below to answer questions
A company commenced business on 1 July 2014. On 30 June 2015, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: $\begin{array}{lllr}\text { Assets } & &{\text { Liabilities }} \\\text { Cash } & £ 40,000 & \text { Trade payables } & £ 80,000 \\\text { Inventory } & 100,000 & \text { Long service leave } & 5,000\\\text { Plant } & 300,000 \\\text { Accumulated depreciation } & (30,000)\end{array}$
Additional information:

1. The plant was acquired on 1 July 2014. Depreciation for accounting purposes was 10% (straight-line method), while 15% (straight-line) was used for tax purposes.

2. The tax rate is 30%.

Using the following worksheet, determine the deferred tax asset and deferred tax liability.
$\begin{array}{|c|c|c|c|c|c|c|}\hline &\begin{array}{c}\text { Carrying } \\\text { amount }\end{array} & \begin{array}{c}\text { Future } \\\text { taxable } \\\text { amount }\end{array} & \begin{array}{c}\text { Future } \\\text { deductibl } \\\text { e amount }\end{array} & \begin{array}{c}\text { Taxable } \\\text { base }\end{array} & \begin{array}{c}\text { Deductible } \\\text { temporary } \\\text { differences }\end{array} & \begin{array}{c}\text { temporary } \\\text { differences }\end{array} \\\hline \text { Assets } & \\\hline \text { Cash } & \\\hline \text { Inventory } & \\\hline \text { Plant } & \\\hline & \\\hline \text { Liabilities } & \\\hline \text { Trade payables } & \\\hline \begin{array}{c}\text { Long-service } \\\text { leave }\end{array} & \\\hline & \\\hline & \\\hline \text { Deferred tax liability } & \\\hline \text { Deferred tax asset } & \\\hline\end{array}$

-The deferred tax asset is:

A) £1500;
B) £4500;
C) £5000;
D) £25 500.

Question 21

Which of the following disclosures are optional under IAS 12?

A) the major components of income tax expense;
B) the aggregate current tax or deferred tax that arises relating to items that are charged or credited directly to equity;
C) the amount of deductible temporary differences and unused tax losses, for which no deferred tax asset is recognised in the statement of financial position;
D) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis of calculating the applicable tax rate.

Question 22

Carry-forward tax losses create:

A) a deductible temporary difference and therefore a deferred tax asset in that the company will pay more tax on future taxable profits;
B) a taxable temporary difference and therefore a deferred tax asset in that the company will pay less tax on future taxable profits;
C) a deductible temporary difference and therefore a deferred tax liability in that the company will pay more tax on future taxable profits;
D) a deductible temporary difference and therefore a deferred tax asset in that the company will pay less tax on future taxable profits.

Question 23

To the extent that tax payable exists and has NOT yet been paid, a company will recognise:

A) current tax asset;
B) non-current asset;
C) non-current liability;
D) current tax liability.

Question 24

ABC Limited has an asset with a carrying value of €50 000. The tax base of this asset is €40 000. The tax rate is 30%. As a result, which of the following deferred tax items does Roland Limited have?

A) A deferred tax asset of €10 000;
B) A deferred tax liability of €3000;
C) A deferred tax liability of €10 000;
D) A deferred tax asset of €3000.

Question 25

Beta Limited has an accounting profit before tax of €200 000. All of the following items have been included in the accounting profit: depreciation of equipment €30 000 (tax deductible depreciation is €20 000); entertainment expenses €15 000 (non-deductible for tax purposes); Long service leave expense provided €6000 (no employee took long service leave during the year). The tax rate is 30%. The amount of current tax liability is:

A) €81 300;
B) €50 700;
C) €69 300;
D) €38 700.

Question 26

If a taxation authority amends a company's assessment, the company should:

A) Debit income tax expense if more tax needs to be paid;
B) Credit income tax expense if less tax needs to be paid;
C) Analyse the reason for the adjustment and consider whether both current and deferred tax are affected;
D) Treat the adjustment as a prior period adjustment.

Question 27

According to IAS 12, current tax for current and prior periods shall, to the extent unpaid, be recognised as a:

A) Note to the financial statements;
B) Contingent liability;
C) Liability;
D) Expense.

Question 28

The tax effect method of accounting for a company's income tax is based on an assumption that:

A) income tax expense is equal to income tax payable;
B) an accounting balance sheet and a tax balance sheet are the same;
C) a tax balance sheet is prepared according to accounting standards;
D) income tax expense is not equal to current tax liability.