VIGAS DE ATADO

Bank Current tax payable: normal tax

20X2 CTP 13 000 Bank 13 000 Balance 10 000 20X2 Tax 3 000

13 000 13 000

Example 14A: calculation of first provisional payment of normal tax in 20X1

A Ltd has a 31^st December year-end. In 20X1 financial year, its first provisional payment will fall due on 30^th June 20X1 and its second will fall due on 31^st December 20X1. The provisional payments are payments based on estimated taxable profits for 20X1.

On 30^th June 20X1 the financial director estimated that the taxable profits for the whole of the 20X1 year will be 25% up on 20X0 taxable profits of C80 000. The estimated taxable profit for the 20X1 year is therefore C100 000 (C80 000 x 1,25).

Required:

Calculate the first provisional payment due and post the entries in t-account format assuming it was paid on due date.

Solution to example 14A: calculation of first provisional payment of normal tax in 20X1 The first provisional tax payment (paid on 30^th June 20X1): (C100 000 x 30%) / 2 = C15 000

Bank Current tax payable: normal tax (A)

CTP: NT ⁽¹⁾ 15 000 Bank ⁽¹⁾ 15 000

(1) payment of the first provisional tax payment

Notice that the payment is posted to the Current tax payable account with no entry being made at this stage to the tax expense account. Assuming that there was no opening balance owing to the tax authority, this account will temporarily have a debit balance until the tax expense and related credit is journalised, (this journal will be posted when finalising the financial statements).

Example 14B: calculation of second provisional payment of tax in 20X1

Example continued from example 26A: On 31 December 20X1 (6 months later) the financial director estimated that the taxable profits for the entire 20X1 year will amount to C112 000.

Required:

Calculate the second provisional payment due and post the entries in t-account format assuming it was paid on due date.

Solution to example 14B: calculation of second provisional payment in 20X1 The second provisional tax payment: (C112 000 x 30%) – C15 000 = C18 600

Bank Current tax payable: Normal Tax (L)

CTP: NT ⁽¹⁾ 15 000 Bank ⁽¹⁾ 15 000 CTP: NT ⁽²⁾ 18 600 Bank ⁽²⁾ 18 600

(2) payment of the second provisional tax payment

Example 14C: calculation of current tax expense estimate for 20X1

Example continued from example 26B: The accountant made his final estimate of the taxable profit for the year (when finalising the financial statements ended 31 December 20X1 on 18^th March 20X2) to be C130 000. Assume that taxable profits equalled the profit before tax (i.e.

there were no permanent differences or temporary differences).

Required:

Calculate the current normal tax and show the related t-accounts for the 20X1 year.

Solution to example 14C: calculation of current tax expense estimate in 20X1 The current tax expense estimated and provided for by the accountant:

C130 000 x 30% = C39 000

This amount will be included in the tax expense line item in the statement of comprehensive income.

Bank Current tax payable: Normal Tax

20X1 year 20X1 year 20X1 year

CTP: NT ⁽¹⁾ 15 000 Bank ⁽¹⁾ 15 000 Taxation ⁽³⁾ 39 000 CTP: NT ⁽²⁾ 18 600 Bank ⁽²⁾ 18 600

Balance c/d 5 400

39 000 39 000

Balance b/d 5 400

Taxation: normal tax (E)

20X1 year

CTP: NT ⁽³⁾ 39 000

(3) journalising the final estimate of current tax made by the accountant.

Example 14D: under/ over provisions of 20X1 current normal tax

Example continued from example 26C: According to the assessment received from the tax authority on 31 May 20X2, the taxable profits for 20X1 came to C150 000. The total tax liability has therefore been assessed as C45 000 (C150 000 x 30%).

Required:

Calculate the amount of the under/ over provision of current normal tax in 20X1 and make the necessary journal entries in the t-accounts.

Solution to example 14D: under/ over provisions of 20X1 current normal tax

The tax expense in the statement of comprehensive income for 20X1 was underprovided by:

45 000 – 39 000 = C6 000

Bank Current tax payable: Normal Tax (L)

20X1 year 20X1 year 20X1 year

CTP: NT ⁽¹⁾ 15 000 Bank ⁽¹⁾ 15 000 Taxation ⁽³⁾ 39 000 CTP: NT ⁽²⁾ 18 600 Bank ⁽²⁾ 18 600

Balance c/d 5 400

39 000 39 000

20X2 year

Balance b/d 5 400

U/prov tax⁽⁴⁾ 6 000

Taxation: normal tax (E)

20X1 year 20X1 year

CTP: NT ⁽³⁾ 39 000 P & L 39 000

20X2 year

CTP: NT ⁽⁴⁾ 6 000

(4) adjustment made in 20X2 relating to the under-provision of tax expense in 20X1. This is classified as a ‘change in estimate’, which is covered in more detail in IAS 8. This could be debited directly to tax expense instead, if preferred.

Example 14E: current normal tax transactions in 20X2

Example continued from example 14D: The first provisional tax payment of C30 000 was paid during 20X2. The company failed to pay the second provisional payment. The accountant’s final estimate of tax for 20X2 was C50 000. There are no permanent or temporary differences, (i.e. accounting profits equalled the taxable profits).

Required:

Post all related entries in the ledger accounts.

Solution to example 14E: current normal tax transactions in 20X2

Bank Current tax payable: normal tax (L)

20X1 year 20X1 year 20X1 year

CTP: NT ⁽¹⁾ 15 000 Bank ⁽¹⁾ 15 000 Taxation ⁽³⁾ 39 000 CTP: NT ⁽²⁾ 18 600 Bank ⁽²⁾ 18 600

Balance c/d 5 400

20X2 year 39 000 39 000

CTP: CT ⁽⁵⁾ 30 000 20X2 year 20X2 year

Bank ⁽⁵⁾ 30 000 Balance b/d 5 400

U/prov tax ⁽⁴⁾ 6 000

Balance c/d 31 400 Taxation ⁽⁶⁾ 50 000

61 400 61 400

Balance b/d 31 400

Taxation: normal tax (E)

20X1 year 20X1 year

CTP: NT ⁽³⁾ 39 000 P & L 39 000

20X2 year 20X1 year

CTP: NT ⁽⁴⁾ 6 000

CTP: NT ⁽⁶⁾ 50 000 P & L 56 000

(5) payment of the first (and only) provisional payment made in 20X2

(6) recording (providing for) the final estimate of current tax made by the accountant

8. Brief introduction to the disclosure of taxes

IAS 1 and IAS 12 require certain tax disclosure in the statement of comprehensive income, statement of financial position and related notes to the financial statements. On occasion, tax may also be disclosed in the statement of changes in equity. The disclosure of tax in the statement of changes in equity will be covered in the chapters dealing with items that are charged directly to equity.

8.1 Statement of financial position disclosure

IAS 1 requires that the amount of current taxes owing or receivable be shown on the face of the statement of financial position as current assets or current liabilities.

The amount owing to (or from) the tax authority may relate to a variety of taxes, for instance, there may be amounts owing in respect of:

• VAT;

• Employees’ tax;

• Normal tax; and

• Dividends tax

Each of these balances (asset or liability) must be disclosed separately, unless your entity:

• is legally allowed to settle these taxes on a net basis and

• either intends to settle the asset or liability on a net basis or intends to settle the liability and realise the asset at the same time.

Example 15: disclosure of current tax assets and liabilities

Assume the tax authority owes a company an amount of C20 000 VAT and the company owes the tax authority an amount of C80 000 in normal tax.

Required:

Show the disclosure of the current tax asset and liabilities in the statement of financial position assuming that:

A. the tax authority does not allow the VAT and normal tax to be settled on a net basis;

B. the tax authority allows the VAT and normal tax to be settled on a net basis and the company intends to settle on a net basis.

Solution to example 15: disclosure of current tax assets and liabilities A. No legal right of set-off

Company name

Statement of financial position (extracts) As at …

ASSETS

Year C Current assets

Current tax receivable: VAT 20 000

LIABILITIES Current liabilities

Current tax payable: normal tax 80 000

B. Legal right of set-off and intention to settle on a net-basis