Example of deferred tax on losses carried forward

Example of deferred tax on losses carries forward

Carry forward Losses	200,000
Tax Rate	15%

Calculate the deferred tax?

Solution

Steps for Solution

1. Determine nature of Temporary difference i.e. taxable or deductable temporary difference

2. Apply the Tax Rate

Rules for determining the Temporary Difference

1. Carrying amount is greater than Tax Base = taxable temporary difference = Deferred Tax liability

2. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset

Tip of solving the example

In case of carry forward losses the carrying value is zero.

1. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	0	200,000	200,000	D.T.D*

Deductable Temporary Difference

2. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Asset
	200,000	15%	30,000

In above example the carrying value of liability is nil, while the amount of losses carried value is tax bases for the purpose of calculation of deferred tax. As the tax bases is greater than tax bases so this would result in deductible temporary difference and deferred tax asset.

Example of deferred tax on Development Expenditure

Example of deferred tax on Development Expenditure

Development expenditures during year	$ 9,000
Amortization period of Development expenditure	3 years
Tax Deduction allowed in the year of expenditure
Tax Rate	15%

Calculate the deferred tax?

Solution

Basic Steps for Solution

1. Calculate the carrying amount

2. What is nature of Temporary difference i.e. taxable or deductible temporary difference?

3.  Tax Rate application on the temporary Difference

Basic Rules of Temporary difference Determination

1. Carrying amount is greater than Tax Base = taxable temporary difference = Deferred Tax liability

2. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset

Tip of solving the example

For liability use negative value and compare with tax bases and for asset use positive value and compare with tax bases.

1. Calculate the carrying amount  

Development expenditure	9,000
Amortization for year	(3,000)
Carrying amount	6,000

2. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	6,000	9,000	3,000	D.T.T*

Deductible Temporary Difference

3. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Asset
	6,000	15%	150

In above example the tax deduction was available on expenditure actually incurred during the year; this means the carrying amount would less than tax base.  In this example tax base is $ 9000 as this is allowed tax expenditure for the year.

Example of taxable Temporary difference

Example of taxable Temporary difference

Taxable of temporary arises when carrying exceeds the tax base and taxable temporary difference give rise to deferred tax liability.

Example of taxable Temporary difference

Kirn & Co purchased a machinery charge depreciation rate is 33% while the tax authority give the capital allowances in two installments i.e. 50% each year on straight line method. Calculate deferred tax liability.

Solution

Taxable Temporary Difference Calculation

Year	Carrying Amount	Tax Base	Taxable Temporary Difference
Opening Year 01	100,000	100,000
Depreciation	( 33,000)	(50,000)
Closing Year 01	67,000	50,000	17,000
Depreciation	(33,000)	(50,000)
Closing Year 02	34,000	0	34,000

Deferred Tax Liability

Year	Taxable Temporary Difference	Tax Rate	Deferred liability
Closing Year 01	17,000	25%	4,000
Closing Year 02	34,000	25%	8,500

What is concept of recognizing the deferred liability?

Concept of recognizing the liability is that amount of 34,000 will be depreciated in next year but tax authority will not allow this as expense an organization will required to pay tax in future against 34,000 therefore a tax liability is recognized.

Example of over provision

Example of over provision

Tax is calculated by the management is not final and actual tax payment may be less or over than tax provision. When actual tax paid is less than tax provision then it is called over provision.

Example of over provision

Profit for the year 2001	20,000 $
Tax Rate	20%
Actual Tax paid next year	3,500 $

Calculate the over provision?

Solution

Profit during the year	20,000 $
Provision for Tax Rate 20% of 20,000	4,000 $
Over provision ( 4,000-3,500)	500  $

What is accounting Treatment of over provision

	Particulars	Dr.	Cr.
	Provision  Tax A/C	500 $
	Income Statement A/C		500 $

This treatment may be expressed by reducing the current year income tax charge. It means that over provision reduces current year tax expense. This concept explained below

Profit for the year 2002	30,000 $
Tax Rate	20%
Provision Required	6,000 $
Provision made (6,000- 500)	5,500 $

Example of Current Tax

Example of Current Tax

Tax is charged over the profit made during the year. Tax is charged as per applicable tax laws of the country. Tax is charged by the Government to run various public sector projects like infrastructure projects of different nature and to cater the country defense needs etc.

Example of Current Tax Calculation

Profit during the year	10,000 $
Tax Rate	15%

Calculate the Current tax rate

Solution

Profit during the year	10,000 $
Tax Rate 15% of 10,000	1,500 $
Profit after taxation	8,500 $