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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 5Rate 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 accountiv) 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
Add back depreciation
20,000
220,000
Less capital allowances
(30,000)
(25,000)
(20,000)
(15,000)
(10,000)
Taxable profits
190,000
195,000
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.
£ ‘000’
Carrying amount: Cost
100
Accumulated depreciation
20
40
60
80
-
Tax box: Cost
Accumulated capital all
(30)
(55)
(75)
(90)
(100)
70
45
25
10
Taxable temp. difference
15
Bal c/d on deferred tax a/c (30%)
3
Deferred Tax Account
31/12/00
Bal c/d
P & L (bal. fig)
31/12/01
4.5
1/1/01
Bal b/d
1.5
31/12/02
1/1/02
31/12/03
P & L (Bal. fig)
1/1/03
1/1/04
Final accounts extracts
Income statement
200
Income tax
Profit for the period
140
Workings: Income tax expense
Current year estimated corporation tax liability
57
58.5
61.5
63
Add/(less) transfer to/(from) deferred tax a/c
(1.5)
(3)
60.0
NON-CURRENT LIABILITIES
Deferred tax
CURRENT LIABILITIES
Current tax
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