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ILLUSTRATION 3 Taxable Temporary Differences A company purchased an asset costing shs.1,500 at the end of 2008 the carrying amount is shs.1,000. The cumulative depreciation for tax purposes is shs.900 and the current tax rate is 25%. Required; Calculate the deferred tax liability for the asset. SOLUTION Firstly, what is the tax base of the asset? It is shs.1,500 – shs.900 = shs.600. In order to recover the carrying value of shs.1,000, the entity must earn taxable income of shs.1,000, but it will only be able to deduct shs.600 as a taxable expense. The entity must therefore pay income tax of shs.400 × 25% = shs.100 when the carrying value of the asset is recovered. The entity must therefore recognize a deferred tax liability of shs.400×25% = shs.100, recognizing the difference between the carrying amount of

ILLUSTRATION 3 Taxable Temporary Differences A company purchased an asset costing shs.1,500 at the end of 2008 the carrying amount is shs.1,000. The cumulative depreciation for tax purposes is shs.900 and the current tax rate is 25%. Required; Calculate the deferred tax liability for the asset. SOLUTION Firstly, what is the tax base of the asset? It is shs.1,500 – shs.900 = shs.600. In order to recover the carrying value of shs.1,000, the entity must earn taxable income of shs.1,000, but it will only be able to deduct shs.600 as a taxable expense. The entity must therefore pay income tax of shs.400 × 25% = shs.100 when the carrying value of the asset is recovered. The entity must therefore recognize a deferred tax liability of shs.400×25% = shs.100, recognizing the difference between the carrying amount of

Financial Accounting: The Impact on Decision Makers
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter8: Operating Assets: Property, Plant, And Equipment, And Intangibles
Section: Chapter Questions
Problem 8.2P
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ILLUSTRATION 3 Taxable Temporary Differences A company purchased an asset costing shs.1,500 at the end of 2008 the carrying amount is shs.1,000. The cumulative depreciation for tax purposes is shs.900 and the current tax rate is 25%. Required; Calculate the deferred tax liability for the asset. SOLUTION Firstly, what is the tax base of the asset? It is shs.1,500 – shs.900 = shs.600. In order to recover the carrying value of shs.1,000, the entity must earn taxable income of shs.1,000, but it will only be able to deduct shs.600 as a taxable expense. The entity must therefore pay income tax of shs.400 × 25% = shs.100 when the carrying value of the asset is recovered. The entity must therefore recognize a deferred tax liability of shs.400×25% = shs.100, recognizing the difference between the carrying amount of
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