PART 2: FINANCIAL REPORTING IN PRACTICE
*1577 —Petersford ple prepares accounts to 31 December each year. On 1 January 2010, the
‘company aequired a non-current asset at a cost of £256,000 and decided t0 depreciate
this asset on the straight-line basis over a five-year period, assuming a residual value of
Enil, Depreciation allowed for tax purposes with regard fo this asset in the first five years
of ownership are as follows:
£
year to 31 December 2010 102,400
year to 31 Decomiber 2011 38,400
year f0 31 December 2012 28,800
year t6 31 December 2013, 21,600
year to 31 December 2014 16,200
‘The company's pre-tax profit (after charging depreciation) was £500,000 in the year to
31 December 2010 and remained at a consistent £500,000 per annum for each of the
next four years.
‘Thore are no other non-current assets and there are no differences between taxable profit,
and accounting profit other that those relating to depreciation. A tax rate of 20% applies
throughout.
(@) Without making use of the “sk hase” concept, show the necessary transfers to and
from the deferred tax account for each ofthe five years t6 31 December 2014. Also
calealate and explsin the closing balance on this sceount a 31 December 2014
(b)_ Re-work this exercise using the tox bas concept.
62 Bowtock tl (2.5 12/03 amended) 20 wins
@
IAS 12 Income Taxes was Issued in 1996 and revised in 2000, It detals the requirements rotating to the
accounting treatment of deterred taxes,
Required :
Explain wliy it is considered necessary to provide for deterred tax and briefly outiine the principles of
accounting for deferred tax contalned in IAS 12 Income taxes. (4 marks)
Bovitock purchased an item of plant for $2,000,000 on 1 October 20XO, It had an estimated life of eight
years and an estimated residual value of $400,000. The plant is deprectated on a stralght-lie basts. The tax
authorities do not allow depreciation as a deductible expense. Instead a tax expense of 40% of the cost of
this type of asset can bé claimed against income tax inthe year of purchase and 20% per annum (on a
reducing balance basis) of Its tax base thereafter. The rate of Income tax can be taken as 26%,
Required
In respect of the above iter of pian, calculate the deferred tax charge/oredit in Bowtook's income statement
for the year to 30 September 20X3 and the defarred tax balance In the statement of financial position at that
date, (Bimaris)
Note. Work to the nearest $'000. (Total = 10 marks)