Deferred tax examples and Year Question solutions

Md Mashiur Rahaman ACA

Senior Manager, Finance
Hirdaramani Bangladesh
M: O1830-034856
 Work example-1: current tax & deferred tax
Work example-1: current tax & deferred tax
Mashiur Care (MC) Ltd had an accounting profit of Tk. 1,389,000 for the year ended 30 June 2023.
The following information is relevant:
▪ The accounting profit was after depreciation of Tk. 85,000 (ROUA 25,000, Building 50,000 and Machinery
10,000). Accounting WDV on 30 June 2023 is Tk. 130,000 for Machinery and Tk. 650,000 for Building.
▪ On 1 July 2022, the tax WDV of machinery was Tk. 120,000 and for buildings was Tk. 400,000. Tax
depreciation is claimable at 5% per annum for buildings and 10% per annum for machinery applied to tax
written down value at the start of the year.
▪ MC had incurred finance cost of Tk. 70,000 in the year of which Tk. 10,000 borrowing cost had been
capitalised in accordance with IAS 23. All borrowing costs are deductible for tax purposes in cash basis.
During the year MC added 150,000 as building including the borrowing cost of Tk. 10,000.
▪ MC had paid fines of Tk. 125,000 due to non-compliances with the requirements of the Companies Act,
1994. Fines are not tax deductible.
▪ MC holds some assets under leases. During the year it had recognised finance cost in respect of the leases
was Tk. 15,000 and rentals paid were Tk. 60,000. The depreciation on right of use assets is included in
accounting depreciation above. On 30 June 2023 Lease liability is Tk. 140,000 and Right of Use Assets
(ROUA) is Tk. 125,000.
 Work
Work example-1:
example-1: current
current taxtax
&& deferred
deferred taxtax
Continued
▪ MC has declared a share scheme for its key Management during the year. Under this scheme MC accrued
Tk. 75,000 as expense as per IFRS-2.
▪ MC has paid Tk 85,500 during the year in excess of tax provision provided for the year of 2021-2022 which
is recorded as advance tax.
▪ MC made provision Tk. 25,000 (Previous year 15,000) as loss against translation of the balances of its
foreign creditors as per IAS 21. and provide provision for doubtful debt for Tk. 60,000 (Previous Year
55,000) as per IFRS 9.
▪ Tax is paid at 30%. Gross receipt Tk. 70,050,000 & tax paid at import stage as per section 120. for Tk.
375,000.

Required: Compute the current tax expense and deferred tax for MC for the income year of 2022-23 and
provide related journals.
Solution :Work example-1
Solution: current Tax
Particulars Amount (Tk.) Amount (Tk.) ITA Ref. Timing difference?
Accounting Profit as per Audited Financial statements 1,389,000
Add: Inadmissible expenses and deemed income
Fine for non-compliances of Company Act 1994 125,000 Section 55 No
1,514,000
Add: IFRSs expenses for separate consideration as per taxation

Depreciation on PPE 60,000 3rd schedule Yes

Depreciation on ROUA 25,000
Finance cost on lease liability 15,000 Sec. 55 (Dha) Yes
Provision for share base payments as per IFRS-2 75,000 Section 34 Yes
Provision for doubtful debt (60,000-55,000) 5,000 Section 51 Yes Current and
Translation loss on foreign creditors' balance (25,000-15,000) 10,000 Sec. 45(Cha) Yes
deferred tax computations
190,000
1,704,000
Less: Admissible expense as per ITA 2023
Lease rental paid 60,000 Sec. 55 (Dha) Yes Journals: Current tax
Tax depreciation 39,000 3rd schedule Yes Current tax expense Dr. 478,500
Interest on borrowing cost 10,000 109,000 Section 52 Yes Advance tax Cr. 375,000
Taxable income 1,595,000
Tax payable Cr. 103,500
Tax payable on taxable income 30% 478,500
Minimum Tax as per Section 163
Current tax expense (Previous Year) Dr. 85,500
A. Tax deducted at source mentioned in 163(2b) 375,000
Advance tax Cr. 85,500
B. On gross receipt (163(5)) (70,050,000x0.60%) 420,300
Minimum tax (Higher of A & B) 420,300
Tax expense (Higher of Minimum and Regular tax) 478,500
Less: Tax paid at source Under Section 120 375,000
Tax payable 103,500
 Solution :Work example-1
Solution: deferred tax
Reconciliation of deferred tax liability
Taxable/
IFRS Carrying (Deductible) Deferred tax
As at 30 June 2023 Rate Amount Tax Base difference liability/ (Assets)
Property Plant and Equipment's 30% 780,000** 621,000* 159,000 47,700
Right of Use Assets 30% 125,000 - 125,000 37,500
Lease liability 30% 140,000 - (140,000) (42,000)
Provision for share based payments 30% 75,000 - (75,000) (22,500)
Provision for doubtful debt (60,000-55,000) 30% 60,000 - (60,000) (18,000)
Translation loss on foreign creditors' balance (25,000-15,000) 30% 25,000 - (25,000) (7,500)
A.Deferred tax liability at 30 June 2023 (4,800)

Taxable/
IFRS Carrying (Deductible) Deferred tax
As at 30 June 2022 Rate Amount Tax Base difference liability/ (Assets)
Property Plant and equipment 30% 690,000** 520,000* 170,000 51,000
Right of Use Assets 30% 150,000 - 150,000 45,000
Lease liability (140,000+60,000-15000) 30% 185,000 - (185,000) (55,500)
Provision for share based payments 30% - - - -
Provision for doubtful debt 30% 55,000 - (55,000) (16,500)
Translation loss on foreign creditors' balance 30% 15,000 - (15,000) (4,500)
A.Deferred tax liability at 30 June 2022 19,500
* Working-1
** Working-2
 SolutionDeferred
Solution: :Work example-1
tax
Continued..
Deferred liability (assets) tax: Amount (Tk.)
Deferred tax liability(assets) at 1 July 2022 19,500
Provided/ Adjusted during the year: See reconciliation of
Property Plant and Equipment's (3,300) deferred tax liability
Right of Use Assets (7,500) from previous page
Lease liability 13,500
Provision for share-based payments (22,500) (Y-2023 less Y-2022)
Provision for doubtful debt (1,500)
Translation loss on foreign creditors' balance (3,000)
Total deferred tax expense/(income) (24,300)
Deferred tax liability(assets) at 30 June 2023 (4,800)

Prove of Matching Principle Amounts

Accounting profit as per IFRS FSs 1,389,000 Journals: Deferred tax
Add: Permanent difference of disallowance 125,000 Deferred tax liability Dr. 24,300
Taxable income without temporary difference 1,514,000 Deferred tax income Cr. 24,300
Total tax expense @ 30% 454,200
Current tax 478,500
Deferred tax income on temporary difference (24,300)
Total Tax expense 454,200
Workings
Solutionof:Work
solution: current tax & deferred tax
example-1

Working-1: Tax WDV at 30 June 2023 Machinery Building Total

Tax WDV at 1 July 2022 120,000 400,000 520,000
Add: Addition(150,000-10,000) - 140,000 140,000
Less: Disposal - - -
120,000 540,000 660,000
Less: Tax Depreciation 12,000 27,000 39,000
Tax WDV at 30 June 2023 108,000 51,3000 621,000

Working-2: IFRS WDV at 30 June 2022 Machinery Building Total ROUA

IFRS WDV at 30 June 2023 130,000 650,000 780,000 125,000
Less: Addition - 150,000 150,000
Add: Disposal - - -
130,000 500,000 630,000 125,000
Add: Depreciation 10,000 50,000 60,000 25,000
IFRS WDV at 30 June 2022 140,000 550,000 690,000 150,000
Work example-2: deferred tax
Mars Limited (ML) is engaged in the manufacturing of chemicals.
▪ On July 1, 2022 it obtained a motor vehicle on lease from a bank. Details of the lease agreement are as follows:
I. Instalments of Rs. 480,000 are to be paid annually in advance.
II. The lease term and useful life is 4 years and 5 years respectively.
III. The interest rate implicit in the lease is 13.701%.
IV. Present value of lease payments has been calculated as Rs. 1,600,000
▪ ML follows a policy of depreciating the motor vehicles over their useful life, on the straight-line method.
However, the tax department allows only the lease payments as a deduction from taxable profits.
▪ On 30 June 2023, ML revalued its land from cost of Rs. 2,000,000 to its fair value of Rs. 2,400,000. Tax
authorities do not include revaluation gains in calculation of taxable profits.
▪ The tax rate applicable to ML is 30%. ML’s accounting profit before tax for the year ended June 30, 2023 is Rs.
4,900,000. Since it is first year of ML’s operations, there was no deferred tax liability balance as at June 30,
2022.
▪ There are no temporary differences other than those evident from the information provided above.
Required: Prepare journal entries in the books of Mars Limited for the year ended June 30, 2023 to record current
tax and deferred tax (revaluation and lease entries are not required).
Solution: Work example-2
Work example-3: Prove of matching principle

Kashif Limited (KL) made accounting profit before tax of Rs. 50,000 in each of the years, 2021, 2022 and 2023 and
pays tax at 30%.

o KL bought an item of plant on 1 January 2021 for Rs. 10,000.

o This asset is to be depreciated on a straight-line basis over 3 years and has an estimated residual value of Rs.
1,000. Accounting depreciation is not allowed as a taxable deduction in the jurisdiction in which KL operates.
Instead, tax depreciation at 40% reducing balance method is allowed.
o On 31 December 2023, KL disposed the asset for Rs. 1,000. The gain on disposal is taxable and loss on disposal
is deductible under relevant tax laws.

Required: Prepare extracts of statement of profit or loss from 2021 to 2023 showing profit before tax, tax expense
and profit after tax:
(a) Ignore deferred tax
(b) Recognise deferred tax using asset/liability approach and income approach.
Solution: Work example-3
Solution: Work example-3
Accounting of Revaluation of Land including deferred tax:

Accounting of Revaluation of Fixed assets including deferred tax:

Example:
2020 Cost Price of Land: BDT 1000
2023 Revalued: BDT 1200

Journal:
Land Dr 200
Reserve (OCI) Cr 200

Deferred tax:
Deferred tax expense (OCI) 8
Deferred tax liability 8
(200*4%=8 , final tax)
Year question
Jul-Aug 2023/ 2022:
5. Paxar Limited (Paxar) reported the following activities and results at the time of finalizing its financial statements for the year ended 31 December
2022:
I. Advertising cost incurred BDT 15 million. This cost is to be allowed as a tax deduction over 5 years from 2021 to 2025.
II. Trade and other payables amounted to BDT 40 million as on 31 December 2022 which include unearned commission of BDT 10 million.
Commission is taxable when it is earned by the company. Tax base of remaining trade and other payables is BDT 25 million.
III. Other receivables amounted to BDT 17 million as on 31 December 2022 which include dividend receivable of BDT 8 million. Dividend income is
taxable on receipt basis at 20% in 2023. Tax base of remaining other receivables is BDT 6 million.
IV. On 1 April 2022, Paxar invested BDT 40 million in a fixed deposit account for one year at 10% per annum. Interest will be received on maturity.
Interest was taxable on receipt basis at 10%.
V. On 1 January 2020, a machine was acquired on lease for a period of 4 years at annual lease rental of BDT 28 million, payable in advance. Interest
rate implicit in the lease is 10%. Under the tax laws, payments are allowed on cash basis in the year of payment.
VI. Details of fixed assets are as follows:
▪ On 1 January 2018 Paxar acquired a plant at a cost of BDT 250 million. It has been depreciated on straight line basis over a useful life of six years.
Paxar is also obliged to incur decommissioning cost of BDT 50 million at the end of useful life of the plant. Applicable discount rate is 8%.
▪ On 1 July 2022 Paxar sold one of its four buildings for BDT 60 million. These buildings were acquired on 1 January 2018 at a cost of BDT 100 million
each having useful life of 30 years.
The dismantling costs will be allowed for tax purposes when paid. Tax depreciation rate for all owned fixed assets is 10% on reducing balance
method. Further, full year’s tax depreciation is allowed in the year of purchase while no depreciation is allowed in the year of disposal. Applicable tax
rate is 30%.
Requirement: Compute the deferred tax liability/asset to be recognized in Paxar Limited’s statement of financial position as on 31 December 2022.
Show detailed calculation.
Year question
Solution: Jul-Aug 2023 Amount'000
Taxable/ (Deductible) Deferred tax
Items IFRSs base Tax Base Tax Rate Remarks
difference Liability/ (Assets)
Advertisement - 9,000 (9,000) 30% (2,700) Remaining three years
Un-earned commission (10,000) (10,000) - 30% -
Trade and Other Payable (30,000) (25,000) (5,000) 30% (1,500)
Other receivables 9,000 6,000 3,000 30% 900
31-Dec-23 Dividend receivable 8,000 - 8,000 20% 1,600 In Question, Yr 2021 does not make any sense.
Interest receivable on FDR 3,000 - 3,000 10% 300
Right of use Assets 24,408 - 24,408 30% 7,322
Lease liability (28,000) - (28,000) 30% (8,400)
PPE 109,418 191,909 (82,491) 30% (24,747)
Provisioning for decommissioning (46,296) - (46,296) 30% (13,889)
(41,114)
Calculation of ROA
Amount Interest factor Present Value IFRS Carrying Vulue-PPE Plant Building Total
2020 28,000 1.000 28000 Cost 250,000 100,000 350,000
2021 28,000 0.909 25455 PV of decommissioning cost 31,508 - 31,508
2022 28,000 0.826 23140 Less: Disposal (25,000) (25,000)
2023 28,000 0.751 21037 Cost Value at 31 Dec 2022 281,508 75,000 356,508
ROA at 1 Jan 2020 97,632 Less: Accumulated Depreciation (2018-2022) 234,590 12,500 247,090
Depreciation (2020-2022)- For 3 Years x (97,632/4 Years) 73,224 Carrying value 31 Dec 2022 46,918 112,500 159,418
ROA at 31 Dec-2022 24,408 Tax Carrying Value-PPE
Loan Amortization schedule Tax Carrying Value 147,623 44,287 191,909
Year Opening Payments Interest @10% Closing
2020 97,632 28000 6,963 76,595 Tax Carrying Value = Cost x (1- 0.10)^5
2021 76,595 28000 4,860 53,455 Plant = 250,000x (1- 0.10)^5
2022 53,455 28000 2,545 28,000 Building = 75,000x (1- 0.10)^5
2023 28,000 28000 (0) (0)
Year question
Mar-Apr 2021: 3 The Company’s 2020 pretax accounting income was Tk 8,000. This includes Tk
The Desh Company began operations in 2015, engaging in a number of business 2,000 of interest income on municipal bonds that is not taxable. The history of
activities ranging from manufacturing and marketing durable goods to writing taxable income reported by the company since it began operations:
technical business textbooks on which the firm collects royalty income. The
accounting for these many activities resulted in a number of differences
between reporting for book and tax purposes. For financial reporting purposes,
the company accrued estimated warranty costs when it sold products under
warranty, deferred advance royalty payment it received and prepaid many
operating expenses. For tax purposes, it recognized warranty costs when paid,
royalty income when cash was received and operating expenses when cash was
paid. The opening and closing balances in these accounts for 2020 were: The company elected the carryforward option for the 2017 loss. As of January
1, 2020 Tk 33,000 of the NOL had been used, leaving a carryforward balance
of Tk 26,000.
The marginal tax rate the company expected to be effective in 2020 and 2021
( and for all prior years) is 34%. However, during 2020 a tax law was enacted
that will change the tax rate to 40% for 2022 and subsequent years.
There are no prior taxes currently payable or any prior tax refunds currently
All three accounts are classified as current items on the balance sheet. The receivable. At January 1, 2020, there are opening balances in the deferred tax
company depreciates its manufacturing equipment using an accelerated assets account of TK 29,240, in the valuation allowance of Tk 5,100 and in the
method for tax purposes and a straight-line method for financial reporting. The deferred tax liability account of Tk 15,980.
schedule of book and tax depreciation for 2020 and all remaining years for the
company’s existing equipment is: Requirements:
(a) Determine the 2020 income tax expense assuming that the company
expects taxable income exclusive of temporary differences to be Tk 20,000 in
2021 but cannot support a forecast of taxable income for subsequent years.
(b) Prepare the journal entry to record the company’s income tax expense for
2020 and determine the net current and non-current deferred tax asset and
deferred tax liability to be reported in the balance sheet.
 Year question Solution (Mar-Apr 2021-3)
Calculation of current tax: Amount Calculation of Deferred tax Assets and Liability:
Accounting Profit 8,000 Taxable/ Deferred tax
Less: Exempted Income 2,000 Tax
IFRS Base (Deductible) Tax rate Assets/
6,000 base
Items difference Liability
Add: IFRS expense/ Income Accrued warranty (40,000) - (40,000) 34% (13,600)
Accounting Dep. 9,000 (27,200)
Deferred royalty income (40,000) - (40,000) 34% (13,600)
Warranty cost (10,000) 31-Dec-20 Prepaid expense 25,000 - 25,000 34% 8,500
Prepaid expense 8,000 12,100
PPE 27,000 18,000 9,000 40% 3,600
Royalty income 30,000 37,000 Total (28,000) 18,000 (46,000) (15,100)
Less: Tax expenses Deferred tax Assets as at 31 Dec 2020 15,100
Tax dep. 14,000 14,000 Deferred tax Assets as at 31 Dec 2019 (Tk.29, 240-Tk. 15,980) 13,260
29,000 Deferred tax Income (1,840)
Less: Carry forward loss 26,000
Deferred tax liability (15,980-12,100) Dr 3,880
Taxable income 3,000
Journal: Deferred tax asset (29,240-27,200) Cr 2,040
Tax@34% 1,020
Deferred tax income Cr. 1,840
Journal:
Current tax expense 1,020 Valuation allowance: Amount( Tk)
Tax liability 1,020 Total Temporary Difference –Deductible 46,000
Less: 2021's forecasted profit (20,000)
2020’s PL: Non- adjustable difference 26,000
Tax expense = 1,020-1,840+2,720 = 1,900 Less: 2020's taxable income (3,000)
23,000
Valuation allowance as at 31 Dec 2020 (Tk. 23000x34%) 7,820
Balance sheets:
Valuation allowance as at 31 Dec 2019 5,100
Deferred tax assets 27,200 Tax expense 2,720
Deferred tax liability 12,100 Tax expense Dr. 2,720
Valuation Allowance 7,820 Journal:
Valuation Allowance Cr 2,720
Year question
Nov-Dec 21: 3 (a)
Solution
Lake Ltd. has the following results of
operations on December 31, 2019:
• Pretax accounting income in 2019, its
first year of operation, totals Tk 100,000.
Taxable income is Tk 90,000.
• Lake Ltd. has credit sales included in
pretax accounting income totaling Tk
60,000, none of which is included in
taxable income. This amount will be
included in taxable income in future years.
• The firm expensed in its financial
statements Tk 50,000 as a provision for
future warranty costs in 2019. This amount
was not deductible for tax purposes in
2019 but will be deductible in future years.
The journal entry would be as follows:
• The enacted marginal tax rate for 2019
and all future years is 40%. Income tax expense (current portion) 36,000
Income tax expense (deferred portion) 4,000
Requirement: Deferred tax asset 20,000
Determine income taxes payable and any
deferred tax account amounts and show Deferred tax liability 24,000
the journal entry to record income tax Income tax payable 36,000
expense for 2019.
Year question
Nov-Dec 21: 3 (b) Lake Ltd. continues operation in 2020, with the following Solution:
activities and results:
• Pretax accounting income in 2020 totals Tk 180,000. This includes Tk 100,000
of instalment sales that are not included in taxable income. Collection during
2020 of prior year instalment sales total Tk 30,000.
• Included in expenses for financial reporting are estimated warranty cost of Tk
120,000. Warranty costs actually incurred during 2020 total Tk 10,000.
• On January 1, 2020 Lake Ltd. purchases machinery at a cost of Tk 100,000.
The machinery has a five-year estimated useful life with zero salvage value.
Straight-line depreciation will be used for financial reporting. For tax reporting,
the machinery will be depreciated in the amounts of Tk 45,000, Tk 35,000 and
Tk 20,000 in 2020, 2021 and 2022 respectively (an accelerated schedule).
• Lake Ltd. sublets a portion of its warehouse to another company and requires
rent to be paid in advance. Lake received an advance rent payment of Tk
20,000. This amount is included in taxable income in 2020 but will be included
in pretax accounting income of 2021.
• During 2020 a new tax law is enacted, decreasing the marginal tax rate to 35% Journals:
beginning January 1, 2021. (Taxable income in 2020 is taxed at the 40% rate).
Income tax expense (current portion) 86,000
• Management is confident the company will continue to be profitable in the
future. Deferred tax asset 43,000
• Beginning 2020 deferred tax asset: Tk 20,000; deferred tax liability: Tk 24,000. Income tax expense (deferred portion)12,750

Requirement: Deferred tax liability 30,250

Determine income taxes payable and any deferred tax account amounts and Income tax payable 86,000
show the journal entry to record income tax expense for 2020.
Thank You