Reference no: EM132939182

The above entries have given rise to a deferred tax asset and a deferred tax asset. AASB 112 allows these amounts to be offset so that only the net amount is shown (which in this case is a net amount of $1200 which would be disclosed as a deferred tax liability).

An entity shall offset deferred tax assets and deferred tax liabilities if, and only of:

(a) The entity has a legally enforced right to set off current tax assets against current tax liabilities; and
(b) The deferred tax assets and the deferred tax liabilities relate to income taxes levelled by the same taxation authority on either;
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

In relation to income tax assesses by the ATO, both of the above conditions would normally be satisfied. Hence, assuming that the above conditions are satisfied, the final offsetting journal entry would be made:

Debit deferred tax liability 7500
Credit deferred tax asset 7500

• In considering the above entities, it should be acknowledged that the tax expense of $99000 would be shown in the statement of comprehensive income. The net balance of the deferred tax liability, being $1200 (after offsetting the deferred asset of $75000), would be shown in the statement of the financial position as a non-current liability, income tax payable would be disclosed in the statement of financial position as a current liability.

Problem 1. Assume that for a particular company the only temporary difference for tax-effect accounting purposes relates to the depreciation of a newly acquired machine. The machine is acquired on 1st July 2011 at a cost of $250000. Its useful life is considered to be five years; after which time it is expected to have no residual value. For tax purposes it can be fully written off over two years. The tax rate is assumed to be 30 per cent.

REQUIRED

(a) Determine whether the depreciation of the machine will lead to a deferred tax asset, or a deferred tax liability.

(b) What would be the balance of the deferred tax asset or deferred tax liability asset as at 30 June 2014?