Reference no: EM132966211

Question 1 - Elvis Inc. acquired a patented technology that expires in 10 years and a licence to use a custom made software for 5 years at consideration of HKD4.5 million and HKD2.4 million respectively on 1 October 2015. Amortisation is calculated on an annual basis over a 5-year estimated useful life for both intangible assets. For tax purposes, the cost of a patent is a non-deductible expenditure and the software licence is fully deductible in the year of acquisition. Tax rate applicable to Elvis is 30%.

Required - Calculate the temporary differences and deferred tax asset/liability of Elvis at the year-end date of 30 September 2019.

Question 2 - The following information was extracted from the financial statements of Elvis Limited for the years ended 31 March 2019 and 2020:

(1) Profit before tax $270,000 and $330,000 for years ended 31 March 2019 and 2020 respectively.

(2) Plant

The company commenced operation on 1 April 2018 when it acquired a plant for $200,000. On 1 April 2019, the company acquired an additional plant for $50,000. Depreciation for accounting purposes is 10% per annum on straight-line basis. Depreciation allowances for 2019 and 2020 as agreed with the Inland Revenue Department amounted to $128,000 and $39,200 respectively.

(3) Goodwill $12,000 and $9,000 as at 31 March 2019 and 2020 respectively.

Goodwill arising on acquisition for $15,000 on 1 April 2018 is impaired for $3,000 (2019) and $3,000 (2020). Impairment of goodwill is not allowed as a deduction in determining taxable profit.

Required -

(a) Calculate the current tax expense for Elvis Limited for the years ended 31 March 2019 and 2020. Tax rate for the two years is at 16%.

(b) Prepare the journal entries in relation to the deferred tax account for the years ended 31 March 2019 and 2020.

Question 3 - Elvis Ltd has the following assets and liabilities as at 31 December 20X9:

(a) Interest payable of $35,000 was accrued. For tax purposes, interest expense is deductible only when it is paid.

(b) Elvis purchased equipment for $3,000,000 on 1 January 20X7. The estimated useful life of the equipment is ten years with residual value of $500,000. Depreciation of $300,000 each year is allowed for tax purposes.

(c) Elvis has trade receivables with a carrying amount of $6,250,000, for which allowance for doubtful debts amounting to $500,000 have been made. The allowance is not allowed for tax deduction until it is actually incurred.

For each of the above items, determine the amount of deferred tax liability (or asset) that will arise as at 31 December 20X9. Profits tax rate is 16.5%.