5. Quiz Income Taxes

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Quiz: Income taxes

Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB, 30 April to 4 May 2012

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

2Quiz: income taxesQuestion 1: Entity has tax loss 30,000 in 20X8 and taxable profit 20,000 in 20X7. Tax rate 40%. Tax loss can be carried back one prior year only (no carryforward). Correct entry?

a. Debit Current tax asset 8,000Credit Current tax income 8,000

b. Debit Current tax asset 12,000Credit Current tax income 12,000

c. Debit Current tax expense 8,000Credit Current tax liability 8,000

d. Debit Deferred tax asset 8,000Credit Deferred tax income 8,000



3Quiz: income taxesQuestion 1: Tax loss 30,000 in 20X8 and taxable profit 20,000 in 20X7. Tax rate 40%. Tax loss carried back one prior year only. Correct entry?







4Quiz: income taxesQuestion 2: Entity has tax loss 30,000 in 20X8. Projected taxable profit for 20X9 is 20,000. Tax rate 40%. Tax loss can be carried forward one year only (no carryback). Correct entry?







5Quiz: income taxesQuestion 2: Entity has tax loss 30,000 in 20X8. Projected taxable profit for 20X9 is 20,000. Tax rate 40%. Tax loss can be carried forward one year only (no carryback). Correct entry?







6Quiz: income taxesQuestion 3: At 31/12/X2 entity has an interest receivable CU4,000 that will be taxable in X3 when received in cash. Tax rate 20% first 500,000 income and 30% on excess. Taxable profit in X2 = 450,000. Estimated taxable profit X3 = 550,000. What is deferred tax liability 31/12/X2 for receivable?

a. 1,200 b. 1,000 c. 940d. 836 e. 800



7Quiz: income taxesQues. 3: What is deferred tax liability 31/12/X2 for receivable?

a. 1,200 b. 1,000 c. 940

d. 836* e. 800

Estimated effective tax rate = [(500,000 × 20%) + (50,000 × 30%)] ÷ 550,000 = 115,000 ÷ 550,000 = 20.91%. 4,000 × 20.91% = 836



8Quiz: income taxesQuestion 4: Tax rate is 30% on operating profit, 0% on capital gains. In 20X1 entity has pre-tax operating profit 50,000 and gain on sale of an asset of 5,000. Entity believes gain is capital gain, but small possibility (estimated 20%) that tax authority says it is operating. What is current tax liability at 31/12/X1?

a. 16,500 b. 16,200c. 15,300 d. 15,000



9Quiz: income taxesQuestion 4: What is current tax liability at 31/12/X1?

a. 16,500 b. 16,200

c. 15,300 d. 15,000

IAS 12 is silent on the treatment of uncertain tax positions. One way of treating the uncertain tax positions is to use probability weighted amounts: CU50,000 x 30% = CU15,000 tax on oper. profit(CU5,000 x 80% x 0%) + (CU5,000 x 20% x 30%) = CU300 tax on capital gain



10Quiz: income taxesQues. 5: Which is the correct use of discounting in measuring income tax assets and liabilities?

Choice Current tax assets and liabilities

Deferred tax assets and liabilities

a Discounted Not Discountedb Not Discounted Discountedc Discounted Discountedd Not Discounted Not Discounted


11Quiz: income taxesQues. 5: Which is the correct use of discounting in measuring income tax assets and liabilities?

Choice Current tax assets and liabilities

Deferred tax assets and liabilities

a Discounted Not Discountedb Not Discounted Discountedc Discounted Discountedd Not Discounted Not Discounted


12Quiz: income taxesQuestion 6: Tax year ends 31 December. By 30 September entity must pay provisional tax based on prior year’s taxable profit. Tax rate is 30%. For 20X4 taxable profit was 50,000. Consequently, on 30/09/20X5 entity paid 15,000 toward 20X5 taxes. Taxable profit for 20X5 = 40,000. •What is tax expense for 20X5?•What is current tax asset at 20X5?•What journal entry should be made at 31/12/X5?



13Quiz: income taxesQuestion 6: Tax expense 20X5: 30% x 40,000 = 12,000Current tax asset at 31/12/20X5: 15,000 paid minus 12,000 owed. Tax asset is a receivable from the tax authority.Journal entry at 31/12/20X5:Debit current tax asset 3,000Credit tax expense* 3,000

*Assumes that on 30/09/20X5 the debit for the 15,000 payment was to ‘tax expense’.



14Quiz: income taxesQuestion 7: Entity A purchased an item of PPE on 1 January 20X1 for CU1,000. The estimated useful life of the PPE is 10 years and the residual value was estimated to be zero. These estimates have not changed.The tax authorities in the jurisdiction in which Entity A operates grant allowances over five years for such PPE.The applicable tax rate is 30 per cent.



15Quiz: income taxesQuestion 7 continued: At 31 December 20X1, the deferred tax balance and profit or loss effect are:a. Liability of CU30, income of CU30b. Asset of CU30, income of CU30c. Liability of CU30, expense of CU30d. Asset of CU30, expense of CU30



16Quiz: income taxesQuestion 7 continued: At 31 December 20X1, the deferred tax balance and profit or loss effect are:a. Liability of CU30, income of CU30b. Asset of CU30, income of CU30c. Liability of CU30, expense of CU30d. Asset of CU30, expense of CU30



17Quiz: income taxesQuestion 8: The facts are the same as Question 7.On 31 December 20X1, Entity A revalued the asset to CU1,300.What journal entry should be processed in the financial records of Entity A to account for the tax effect of the revaluation?



18Quiz: income taxesQuestion 8: Dr Asset—PPE CU400

Cr Income—OCI: revaluation gain CU280Cr Deferred tax liability CU120

CU1,300 revalued amount – CU900 previous carrying amount = CU400.CU400 increase in carrying amount x 30% = CU120



19Quiz: income taxesQuestion 9: The facts are the same as Question 8.What journal entry should be processed in the financial records of Entity A to account for the tax effect of the 20X2 depreciation of the PPE?The estimates of estimated useful life and residual value remain unchanged.



20Quiz: income taxesQuestion 9: Dr Expense—profit or loss: depreciation CU144Cr Asset—PPE CU144CU1,300/9 years = CU144

Dr Expense—profit or loss: deferred tax CU17Cr Deferred tax liability CU17(CU144 accounting depreciation less CU200 tax depreciation) x 30% = CU17



21Quiz: income taxesQuestion 10: •Entity A owns a piece of land classified as PPE. The land is not depreciated and is measured using the revaluation model in IAS 16.•On 1 January 20X1 the entity bought the land for CU1,500 (ie historical cost). •On 31 December 20X1 the land was revalued to CU2,000.•The applicable tax rate for operating profits is 30%. Proceeds on sale in excess of historical cost are taxed only at 15%© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


22Quiz: income taxesQuestion 10 continued: •At what rate should the tax consequences of the revaluation of the land be measured?

a. 30 per centb. 15 per centc. No tax consequences as the land is a non-depreciable asset



23Quiz: income taxesQuestion 10 continued: •At what rate should the tax consequences of the revaluation of the land be measured?

a. 30 per centb. 15 per centc. No tax consequences as the land is a non-depreciable asset

Reason: the land can only be recovered through sale. It is not consumed in the process of generating income.© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


24Questions or comments?

Expressions of individual views by members of the IASB and its staff are encouraged.

The views expressed in this presentation are those of the presenter.

Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.



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The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace.The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.

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5. Quiz Income Taxes