ILLUSTRATIVE EXAMPLE 12.

1
Using a current tax worksheet to determine the current tax liability
Alpha Ltd’s accounting profit for the year ended 30 June 2020 was $250 450. Included in this
profit were the following items of income and expenses.
Amortisation expense — development project $30 000
Impairment of goodwill expense 7 000
Depreciation expense — equipment (15%) 40 000
Entertainment expense 12 450
Insurance expense 24 000
Doubtful debts expense 14 000
Annual leave expense 54 000
Rent revenue 25 000
Loss on equipment sold 6 667
At 30 June 2020, the company’s draft statement of financial position showed the following
balances.
30 June 2020 30 June 2019
Assets
Cash 55 000 $  65 000
Accounts receivable 295 000 277 000
Allowance for doubtful debts (16 000) (18 000)
Inventories 162 000 185 000
Prepaid insurance 30 000 25 000
Rent receivable 3 500 5 500
Development project 120 000 —
Accumulated amortisation — development
project (30 000) —
Equipment 200 000 266 667
Accumulated depreciation — equipment (90 000) (80 000)
Goodwill 35 000 35 000
Accumulated impairment — goodwill (14 000) (7 000)
Deferred tax asset ? 24 900
Liabilities
Accounts payable 310 500 294 000
Provision for annual leave 61 000 65 000
Mortgage loan 100 000 150 000
Deferred tax liability ? 57 150
Current tax liability ? 12 500
Additional information
 Taxation legislation allows Alpha Ltd to deduct 125% of the $120 000 spent on
development during the year.
 Alpha Ltd has capitalised development expenditure relating to a filter project and
amortises the balance over the period of expected benefit (4 years).
 The tax depreciation rate for equipment is 20% p.a. The loss on sale of equipment
included in the accounting profit for the year ended 30 June 2020 refers to equipment
 sold on 30 June 2020 that had an original cost of $66 667 when it was purchased 3
years ago and a carrying amount at the time of sale of $36 667.
 Neither entertainment expenditure nor goodwill impairment expense is deductible for
taxation purposes.
 The company income tax rate is 30%.

Required
Calculate the current tax payable.

Solution
Before completing the worksheet, all differences between accounting and taxation figures
must be identified. (Note: The effects of these in the current tax worksheet are seen in figure
12.2.)

(i) Amortisation expense — development project

In relation to the development costs, for accounting purposes the $120 000 has been
capitalised and is amortised over 4 years, being $30 000 p.a. Therefore, the accounting
expense related to the development project for the year ended 30 June 2020 is $30 000.
However, for taxation purposes, the taxation authority allows a tax deduction of $150 000
(being $120 000 + [25% × $120 000]). The extra 25% deduction (being $30 000 = 25% ×
$120 000) allowed by tax legislation is never recognised as an accounting expense, but is
deductible for tax, together with the full amount of the development costs paid.

(ii) Impairment of goodwill expense

The accounting expense related to goodwill impairment is $7000. However, as no tax
deduction is allowed for goodwill impairment, the tax deduction is zero.

(iii) Depreciation expense — equipment

The accounting expense related to depreciation of the equipment is $40 000. The amount of
tax deduction for depreciation of equipment is $53 333 (being $266 667 × 20%).

(iv) Entertainment expense

The accounting expense related to entertainment is $12 450. No tax deduction is allowed for
entertainment expenditure, so the tax deduction is zero.

(v) Insurance expense

The accounting expense related to insurance is $24 000. Insurance expenditure is deductible
when paid. The existence of a Prepaid insurance asset account in the statement of financial
position indicates that the insurance payment and insurance expense figures are different. It is
therefore necessary to reconstruct the asset account to identify if any part of the expense has
already been deducted for taxation purposes. This is done as follows.

Prepaid insurance

Balance b/d $25 000Insurance expense $24 000

Insurance paid 29 000 Balance c/d 30 000
54 000 54 000
For the Prepaid insurance account:
opening balance ($25 000) + insurance paid ($29 000) − insurance expense ($24 000)
= ending balance ($30 000)
The insurance paid that represents the tax deduction allowable for insurance is therefore
$29 000.

(vi) Doubtful debts expense

The accounting expense related to doubtful debts is $14 000. Under taxation legislation, a tax
deduction is allowed for bad debts written off. The draft statement of financial position shows
that an allowance was raised in the previous year, so any debts written off against that
allowance are deductible in the current year. To determine the amount (if any) of that write-
off, the ledger account of Allowance for doubtful debts is reconstructed as follows.
Allowance for doubtful debts
Bad debts written off $16 000 Balance b/d $18 000
Balance c/d 16 000 Doubtful debts expense 14 000
32 000 32 000

For the Allowance for doubtful debts account:

opening balance ($18 000) + doubtful debts expense ($14 000) − bad debts written off
($16 000)
= ending balance ($16 000)
The bad debts written off that represent the allowable tax deduction for bad debts is therefore
$16 000.

(vii) Annual leave expense

The accounting expense is $54 000. Annual leave is deductible for tax purposes when paid in
cash. The Provision for annual leave indicates the existence of unpaid leave. The amount of
annual leave paid in the current year can be determined by reconstructing the ledger account
as follows.
Provision for annual leave
Leave paid $58 000 Balance b/d $65 000
Balance c/d 61 000 Leave expense 54 000
119 000 119 000
For the Provision for annual leave account:
opening balance ($65 000) + annual leave expense ($54 000) − annual leave paid ($58 000)
= ending balance ($61 000)
The annual leave paid that represents the allowable tax deduction for annual leave is therefore
$58 000.

(viii) Loss on equipment sold

The accounting loss on the sale of equipment is different from the gain (loss) for taxation
purposes, and is calculated as follows.
Accounting Taxation
Cost $ 66 667 $66 667
Accumulated depreciation 30 000 40 000
(For tax: $66 667 × 20% × 3 years)
 Carrying amount 36 667 26 667
Proceeds 30 000 30 000
Gain (loss) $(6 667) $ 3 333
Because the sales proceeds are the same amount for both accounting and taxation purposes,
the difference in the gain/loss on sale is caused by the different carrying amounts for the asset
sold under accounting and taxation. This difference is caused by the use of different
depreciation rates. While for accounting there is an overall loss on sale of equipment that
reduces the accounting profit, for taxation there is a gain. In calculating the taxable profit
based on the accounting profit, the accounting loss on sale needs to be eliminated, while the
taxation gain needs to be added.

ix) Rent revenue

The accounting rent revenue is $25 000. Rent revenue is taxable when received. The presence
in the statement of financial position of a Rent receivable asset indicates that part of the
revenue has not yet been received as cash and is not taxable in the current year.
Reconstructing the ledger account shows the following.
Rent receivable
Balance b/d $ 5 500 Rent received $  27 000
Rent revenue 25 000 Balance c/d 3 500
30 500 30 500
For the Rent receivable account:
opening balance ($5500) + rent revenue ($25 000) − rent received ($27 000)
= ending balance ($3500)
The rent received that represents the taxable revenue for rent is therefore $27 000.

This chapter assumes that sales revenues are taxable and costs of sales are deductible even
when not received/paid in cash, so there are no differences with respect to the accounts
receivable or accounts payable balances. If different assumptions applied, then the amounts
of cash received for sales and cash paid for inventories would need to be determined in order
to calculate the current tax payable.
FIGURE 12.2 Current tax worksheet for Alpha Ltd
ALPHA LTD
Current tax worksheet
for the year ended 30 June 2020
Accounting profit $ 250 450
Add:
Amortisation of development costs (i) $ 30 000
Impairment of goodwill expense (ii) 7 000
Depreciation of equipment expense (accounting) (iii) 40 000
Entertainment expense (iv) 12 450
Insurance expense (v) 24 000
Doubtful debts expense (vi) 14 000
Annual leave expense (vii) 54 000
Loss on equipment sold (accounting) (viii)6 667
Gain on equipment sold (tax) (viii)3 333
Rent received (tax) (ix) 27 000 218 450
468 900
Deduct:
Rent revenue (accounting) (ix) 25 000
Bad debts written off (vi) 16 000
Insurance paid (v) 29 000
Deduction for development costs (i) 150 000
Annual leave paid (vii) 58 000
Depreciation of equipment (tax) (iii)   53 333 (331 333) 
Taxable profit 137 567 
Current liability @ 30% $ 41 270 

According to paragraph 12 of AASB 112/IAS 12, the current tax for the period, to the extent
it is unpaid, is recognised as a liability at the end of the period. Current tax is also recognised
in the income tax expense and included in the profit or loss for the period, except to the
extent that it arises from transactions where the income is recognised in other comprehensive
income or directly in equity (AASB 112/IAS 12 paragraph 58).

For illustrative example 12.1, the journal entry to recognise the current tax for Alpha Ltd at
30 June 2020 is:
2020
June 30 Income tax expense (current) Dr 41 270
Current tax liability Cr 41 270
(Recognition of current tax)
12.4.1 Tax losses
Tax losses occur when allowable deductions exceed taxable revenues.
In Australia, tax losses can be carried forward and deducted against future taxable profits.
This means that an entity that incurs a tax loss has a future tax benefit: provided it earns
taxable profit in the future, it will be able to use the carried forward balances of tax losses to
reduce the tax it needs to pay on that taxable profit. This tax benefit will be recognised as an
asset referred to as ‘a deferred tax asset’. Deferred tax assets and their recognition are
discussed further in section 12.5.
Deferred tax assets relating to tax losses are referred to in this section because of their effect
in determining the measurement of the current tax liability. In dealing with tax losses it is
necessary to distinguish between two events occurring at two different points of time.

1. The creation of carry-forward tax losses. In the year in which a tax loss occurs, there
is no liability to pay tax as there is no taxable profit. Instead a deferred tax asset is
recorded to recognise the future deductibility of the tax loss. The form of the journal
entry is:
Deferred tax asset Dr xxx
Income tax revenue Cr xxx
(Recognition of current period tax loss)

2. Recoupment of carry-forward tax loss. In a period subsequent to that in which the tax
loss was incurred, an entity may earn taxable profit. The amount of tax to be paid on
that period’s taxable profit may then be reduced by claiming a deduction for past tax
losses. In this period, the form of the journal entry for the current period tax liability
is:
Income tax expense (current) Dr xxx
Deferred tax asset Cr xxx
Current tax liability Cr xxx
(Recognition of current tax)

One further point to note in accounting for tax losses is the effect of any exempt income.
Exempt income is recognised as accounting income by the company but not recognised as
taxable by the tax authorities; for example, certain government grants are tax exempt. The
existence of exempt income has an effect both on the creation of a tax loss and the
recoupment of a tax loss.
1. Exempt income and the creation of tax loss. If a tax loss occurs in a period, prior to
determining any deferred tax asset arising from it, exempt income must be added back
to the tax loss to calculate the tax loss after exempt income. It is this number on which
the deferred tax asset is calculated. Exempt income loses its exempt status under these
circumstances.
2. Exempt income and the recoupment of a tax loss. If a company has earned exempt
income in the current period, the deduction for past tax losses must be made firstly
from the exempt income, and only after that from the taxable profit for the current
period. In other words, a tax loss must first be set off against the entity’s exempt
 income before any reduction can be made in relation to the current period’s liability
for tax.

ILLUSTRATIVE EXAMPLE 12.2

Creation and recoupment of carry-forward tax losses

The following information relates to Delta Designs Ltd for the year ended 30 June 2021.
Accounting loss $ 5 600
Exempt income included in accounting loss 2 000
Depreciation expense 14 700
Depreciation for tax 20 300
Entertainment expense (not tax-deductible) 10 000
Income tax rate 30%

The calculation of the tax loss appears below.

DELTA DESIGNS LTD
Current tax worksheet (extract)
for the year ended 30 June 2021
Accounting loss $ (5 600)
Add:
Depreciation expense 14 700
Entertainment expense 10 000
19 100
Deduct:
Depreciation for tax 20 300
Exempt income   2 000
Tax loss before exempt income (3 200)
Add:
Exempt income   2 000
Tax loss after exempt income (1 200)
Deferred tax asset @ 30% $ 360

Assuming that recognition criteria are met, the adjusting journal entry is:
2021
June 30 Deferred tax asset (tax loss) Dr 360
Income tax revenue Cr 360
(Recognition of current period tax loss)
Delta Designs Ltd then makes a taxable profit of $23 600 for the year ending 30 June 2022.
This taxable profit has been determined after considering the existence of an $800 exempt
income amount arising in the current year. The prior period tax loss of $1200 (for the year
ending 30 June 2022) is recouped as follows.

DELTA DESIGNS LTD

Current tax worksheet (extract)
for the year ended 30 June 2022
Taxable profit before tax loss $23 600
Add:
Exempt income  800
24 400
Tax loss recouped  (1 200)
Taxable profit 23 200
Current tax liability @ 30% $ 6 960

The adjusting journal entry is:

2022
June 30 Income tax expense (current) Dr 7 320
Deferred tax asset (tax loss) Cr 360
Current tax liability Cr 6 960
(Recognition of current tax)