Question 1 (Loftus Ch13 CQ15)

Explain when a temporary difference is classified as deductible or taxable for an asset or liability.

Question 2 (Loftus Exercise 13.2 edited)

Torana Ltd applies the principles of tax‐effect accounting as per AASB 112/IAS 12 in accounting for income tax. Torana Ltd calculates depreciation expense on its plant using the straight‐ line method but applies an accelerated method for tax purposes. As a result, tax depreciation in the year ended 30 June 2024 is larger than the related accounting depreciation expense.

Torana  Ltd  has also  recognised  rent  received  in advance from  buildings that  it owns. These receipts are included in the current year’s taxable profit but shown in the financial statements as a liability.

Required

1.   Explain the principles underlying tax‐effect accounting.

2.   Determine  how  Torana  Ltd  should  account  for  the  noted  differences  in  treatment  for accounting and tax of depreciation and rent received in advance.

Question 3

Roche Ltd is reviewing its deferred tax for the year. In each of the following situations calculate carrying  amounts,  tax  bases,  and  temporary  differences  and  prepare  the  end-of-period adjustment journal entries to account for deferred tax.

1. The company purchased a depreciable asset at the beginning of the year for $100 000. For accounting purposes, an annual depreciation rate of 20% straight-line is used, whereas for taxation the rate is 30% straight-line.

2. The company’s provision for annual leave at the beginning and end of the year are $160 000 and $155 000 respectively.

3. In calculating taxable income, the company has deducted $40 000 of development expenditure incurred at the end of the year. There had been no previous deductions for development expenditure. For accounting purposes, this amount has been capitalised as an asset.