ACCG224 LEO Chapter 6 Accounting for Income Taxes Week 4 Tutorial Questions Review Question 1: Outline the different

ent treatments for accounting and tax purposes of the following items: Item a) Depreciation of Non-Current Assets Accounting Treatment Expensed as per AASB 116, often on a straightline basis Purchased Goodwill recognised and subject to an Impairment Test As per AASB 119, requires such items to be accrued Recognised as an accounting expense when regarded as Doubtful Treated as an expense Recognised as an asset, charged to expense overtime Recognised as a liability Regarded as a liability Income Tax Treatment Deduction often based on accelerated rates, or higher straight-line rates Goodwill write-downs not Deductible Deduction when such leave is taken by employees Deduction when written off as bad Not Deductible Tax Deductible when paid

b) Goodwill

c) Long-service leave payable d) Allowance for Doubtful Debts

e) Entertainment Costs f) Prepaid Insurance

g) Warranties Liability h) Rent received in advance

Deduction when warranty costs are incurred Taxable when received in cash

Review Question 3: What are the main principles of tax-effect accounting? The tax-effect method adopted in AASB 112 is based on the assumption that income tax expense (income) in a companys financial statements is not equal merely to the current tax liability (asset) but is also a function of the companys deferred tax liabilities and assets. The tax-effect method focuses on the differences between an entitys statement of financial position/balance sheet prepared under accounting standards and its tax-based balance sheet prepared in accordance with income tax legislation. In accounting for income tax, transactions undertaken by the entity and other events affecting the entity have two separate effects. First, there are the current tax consequences which give rise to the entity recognising a current liability for income tax payable to the ATO. Second, there are future tax consequences in that the accounting for certain transactions affects the entitys payment of income tax in future years. Review Question 10: One of the silliest constructs in the world of accounting happens to be deferred income taxes. I dont understand why we bother with deferred tax liabilities and deferred tax assets because they are neither liabilities nor assets (Ketz, 2010). Discuss.

Case Study 1: Discuss the criteria for recognition of a deferred tax asset, and comment on the application of the criteria to two companies above. Paragraph 24 of AASB 112 specifies that a deferred tax asset shall be recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. Paragraph 28 states: It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse: In the same period as the expected reversal of the deductible temporary difference; or In periods into which a tax loss arising from the deferred tax asset can be carried back or forward.

In such circumstances, the deferred tax asset is recognised in the period in which the deductible temporary differences arise. The probability test is not always satisfied with deferred tax assets, and deferred tax assets can be recognised only to the extent that it is probable that the entity will have enough taxable income in the same period as the reversal of the deductible temporary differences.