University of Kwa-Zulu Natal

Accounting 211
2022

Tutorial week 8
Homework Solutions

Taxation
Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.3

a) False: VAT may only be claimed back if the claimant is a ‘vendor for VAT purposes’. (It
should also be noted that VAT paid on certain items is not allowed to be reclaimed per the
VAT Act).
b) False: VAT will not be charged if the seller is a ‘non-vendor’ and will not be charged if the
goods are considered to be zero-rated or exempt supplies.
c) False: employees’ tax is incurred by the employee. The company only has the obligation to
deduct such tax and pay it over to the tax authorities.
d) False: since employees’ tax is not incurred by the company, it cannot be shown as the tax
expense incurred by the company.
e) False: since the portion of the salaries and wages that are paid over to the Tax authorities is
not a tax expense incurred by the company (but rather an expense incurred by the employee)
it is not shown as part of the tax expense of the company. If it is not shown as tax expense
of the company, it must therefore be included in the salaries and wages expense incurred
by the company.
f) False: VAT paid is either a tax that is able to be reclaimed from the tax authorities,
(therefore shown as a VAT asset), or not able to be reclaimed (shown as part of the cost of
the item purchased). VAT received must always be paid over to the tax authorities, so
should be shown as a VAT liability. The VAT asset and VAT liability accounts may be
netted off and shown as a net VAT asset or liability in the statement of financial position.
g) False: inventories and cost of sales will be shown net of VAT when the VAT is able to be
reclaimed whereas it will be shown inclusive of VAT in the event that VAT is not able to
be reclaimed.
h) False: Dividends tax is a tax on the shareholder. The entity merely has the responsibility
of withholding the dividends tax (in order to pay to the tax authorities) before physically
paying the dividend to the shareholders. Thus, it is not a tax on the entity, so it will not
form part of the entity’s tax expense.
i) False: Dividends tax will form part of the dividend declared and be presented in the
statement of changes in equity.
j) False: If the company is a listed company, dividends tax is only payable when the dividends
are paid. If the company is an unlisted company, dividends tax is only payable on the earlier
of when the dividends are paid or when they are due and payable. In conclusion, the date
that the dividend is declared does not influence when the dividends tax becomes payable.

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.4

a) Journals
Debit Credit
Jan 2.
Inventories (A) 300 000
Accounts payable: Pencil (L) 300 000
Purchase of inventories for C300 000 (no VAT included as from non-vendor)
Jan 5.
Inventories (A) 43 421
Current tax receivable: VAT (A) 6 079
Bank (A) 49 500
Purchase of inventories for C49 500 (including VAT: C49 500x 14/114)
Jan 7.
Accounts receivable: High (A) 1 200
Revenue: sales (I) 1 053
Current tax payable: VAT (L) 147
Sale of goods (including VAT of C1 200 x 14/114)

Cost of sales (E) 450

Inventories (A) 450
Cost of the goods sold: given
Jan 8.
Bank (A) 18 000
Revenue: sales (I) 15 789
Current tax payable: VAT (L) 2 211
Sale of goods (including VAT of C18 000 x 14/114)

Cost of sales (E) 10 500

Inventories (A) 10 500
Cost of the goods sold: given
Jan 12.
Electricity and water (E) 553
Current tax receivable: VAT (A) 77
Bank (A) 630
Payment of electricity and water (including VAT of C630 x 14/114)
Jan 14.
Telephone (E) 250
Current tax receivable: VAT 35
Bank (A) 285
Payment of telephone (including VAT of C285 x 14/114)
Jan 15.
Vehicles: cost (A) 7 500
Current tax receivable: VAT (A) 1 050
Bank (A) 8 550
Purchase of single cab truck from a VAT vendor (including VAT of C8 550 x
14/114): since the vehicle does not meet the definition of a ‘motor car’, the VAT
paid is able to be claimed back

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.4 continued . . .

Debit Credit
Jan 17.
Vehicles: cost (A) 180 000
Loan finance: trader (L) 180 000
Purchase of single cab truck: the vehicle does meet the definition of a ‘motor car’
and thus the VAT paid is not able to be claimed back
Jan 25.
Salaries (E) 15 000
Current tax payable: employees tax (L) 3 000
Bank (A) 12 000
Paid net salaries of C12 000 and owe C2 000 to the tax authorities
Jan 26.
Current tax payable: employees tax (L) 7 500
Bank (A) 7 500
Paid employees’ tax to the tax authorities
Jan 27.
Bank (A) 7 500
Current tax receivable: VAT (L) 7 500
Receipt of VAT refund from the tax authorities
Jan 29.
Bank (A) 18 000
Dividend income (I) 18 000
Dividend income earned
Jan 31.
Dividends declared (OE) 27 000
Current tax payable: dividends tax (L) 4 050
Shareholders for dividends (L) 22 950
Dividends declared, of which 15% is withheld and payable to the tax authorities
(27 000 x 15%) and the balance of 85% is payable to the shareholders
(27 000 x 85%)

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Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.5
All companies are provisional taxpayers. This means that no later than six months into the
company's financial year, the company must estimate its tax for the year and pay half this amount
to the tax authorities. It then has to pay the rest of the estimated tax due by the last day of its
financial year-end, in a second provisional payment. Both the first and second provisional
payments are based on estimated taxable profits.

It is, however, only possible to calculate the final estimate of the tax expense once all accounting
entries for the year have been processed and the company's final profit (or loss) for the year and
taxable profit for the year has been calculated. In practice, the finalisation of accounts takes time
and final figures are normally only available sometime after year-end. Only then can the final tax
expense be estimated and compared to the provisional payments made during the year. These
payments may have been more or less than the calculated amount. A journal entry will need to be
processed to adjust the tax expense to reflect the final tax estimate for the year, resulting in the
statement of financial position reflecting either a current tax receivable (debtor: asset) or payable
(creditor: liability) at year-end.

Usually, the tax authority's assessment of taxable profit and the resultant tax charge will coincide
with that calculated by the company. In this case, if the company still owes any tax (e.g. it has
underpaid), they will have a current tax payable in their statement of financial position and will
merely make a third, "top-up" payment to settle the tax payable. If the company overpaid and has
a current tax receivable, they will set this amount off the next provisional payment or receive a
refund from the tax authority.

It can happen, however, that the tax authority does not agree with the amount calculated by the
company. The amount provided for taxation in the statement of comprehensive income will then
not agree with the tax authority’s assessment and the company will be in the position of having
"overprovided" or "underprovided" for taxation in the previous year.

The facts given suggest that the provisional payments during the current tax year exceeded the final
tax calculated for the current tax year. In other words, there was an overpayment of tax. It is this
overpayment of tax that resulted in the recognition of the current tax receivable (asset) that was
presented in the statement of financial position in the current year.

The facts given also suggest that, during the current year, the tax authority assessed the taxation
due in the prior year as being greater than the final tax calculated and provided (i.e. recognised) by
the company in that prior year. In other words, the tax recognised in the prior year was
underprovided.

IAS 12 par 80(b) requires entities to separately disclose any adjustment recognised in the current
period for current tax of prior periods (i.e. an under or over provision) in the taxation expense note..
The reason for this is because the prior year financial statements are finalised when we receive the
assessment and thus it is too later to make a change to the estimated final tax provided in the prior
year.

Not only must the under-provision of prior year tax be recognised in the current year, it will also
have to be paid in the current year (i.e. the year in which the tax assessment is received).
Suggested discussion outline
• timing of provisional payments;
• the creation of a current tax debtor/creditor at year-end;
• the difference between "over/under-paying" and "over/under-providing";
disclosure of the under provision in the financial statements
• .

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.5

a) Discussion

Definition of a liability
• A present obligation of the entity
• To transfer an economic resource
• As a result of past events.

Recognition criteria
Recognition is appropriate if it results in both
• Relevant information about the elements, and
• A faithful representation of those items.

Discussion: liability
• Since the taxable profits were earned by the entity, the tax thereon is a present legal obligation of
the entity.
• The settlement of the obligation will result in a transfer of an economic resource (an outflow of
cash) when as the amount owing to the tax authorities is paid.
• The event is the earning of the taxable profits: since the profits on which the tax is calculated were
earned before 31 December 20X3, there is a past event.

Discussion: recognition criteria

• The information is relevant as the current tax liability will result in a probable outflow of benefits
since it is a legislative requirement.
• There is faithful representation as the amount owing to the tax authorities is measurable by reference
to the Income Tax.

Definition of an expense
• Decrease in assets, or
• Increases in liabilities
• That result in decreases in equity
• Other than through a distribution to holders of equity claims

Discussion: expense
• There is an increase in liabilities, the amount owing to the tax authorities as represented by the
current tax payable
• Since there has been an increase in liabilities, equity will decrease.
• The tax payable on the profits is not a distribution to holders of equity claims.

Conclusion
Since both the definitions and the recognition criteria have been met, the current tax liability and related
tax expense of C80 000 should be processed.

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.5 continued …

b) Journals

Debit Credit
Income tax expense (SOCI: P/L) 80 000
Current tax payable: income tax (SOFP: L) 80 000
Current income tax estimate for 20X3

Income tax expense (SOCI: P/L) 7 000

Current tax payable: income tax (SOFP: L) 7 000
Under-provision of current income tax estimate in 20X2

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.6

b) Discussion

Definition of a liability
• A present obligation of the entity
• As a result of a past event
• The settlement of which is expected to result in an outflow of future economic benefits.

Definition of an expense
• Decrease in economic benefits
• During the accounting period
• In the form of decrease in assets or increase in liabilities resulting in a decrease in equity
• Other than through a distribution to equity participants.

Recognition criteria
• A reliable estimate must be possible.
• The outflow of future economic benefits must be probable.

Discussion: liability
• Since the taxable profits were earned by the entity, the tax thereon is a legal obligation of the entity.
• The event is the earning/ receiving of the taxable profits: since the profits on which the tax is
calculated were earned/ received before 31 December 20X3, there is a past event.
• The settlement of the obligation will result in an outflow of cash when as the amount owing to the
tax authorities are paid.

Discussion: recognition criteria

• A reliable estimate is possible since the Income Tax Act is available to the public to use in the
estimate thereof / the auditors, who are professionals in this area, have already calculated the
estimated tax.
• The outflow is probable since it has either already been pre-paid via the provisional payment system
/ or will have to be paid since it is a legislative requirement.

Discussion: expense
• The decrease in economic benefits is the tax outflow expected in relation to the profits made (i.e. a
decrease in profits).
• The profits arose in 20X3 and therefore the tax arose in 20X3 and thus it is a decrease in economic
benefits during the accounting period 20X3.
• Since there has been an increase in liabilities, equity will decrease.
• The tax payable on the profits is not a distribution to equity participants.

Conclusion
Since both the definitions and the recognition criteria have been met, the current tax liability and related
tax expense of C80 000 should be processed.

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.5 continued …

b) Journals

Debit Credit
Income tax expense (SOCI: P/L) 80 000
Current tax payable: income tax (SOFP: L) 80 000
Current income tax estimate for 20X3

Income tax expense (SOCI: P/L) 7 000

Current tax payable: income tax (SOFP: L) 7 000
Under-provision of current income tax estimate in 20X2

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.7

a) Ledger accounts

CURRENT TAX PAYABLE/ RECEIVABLE: INCOME TAX

20X1 C 20X1 C
30 June Bank 26 000 31 Dec Income tax expense 56 000
31 Dec Bank 28 000
31 Dec Balance W1: (1) 2 000
56 000 56 000
20X2 20X2
16 May Bank (underpayment) 2 000 1 Jan Balance 2 000
30 June Bank 29 000 31 Dec Income tax expense 58 000
31 Dec Bank 30 000 31 Dec Balance W1: (2) 1 000
61 000 61 000
20X3 20X3
1 Jan Balance 1 000 19 May Income tax expense 1 500
(under-provision)
19 June Bank (underpayment) 500
30 June Bank 31 000 31 Dec Income tax expense 65 000
31 Dec Bank 31 500
31 Dec Balance W1: (3) 2 500
66 500 66 500
20X4 20X4
18 April Income tax expense 200 1 Jan Balance 2 500
(over-provision)
18 May Bank (underpayment) 2 300
30 June Bank 33 000 31 Dec Income tax expense 67 400
31 Dec Bank 34 000
31 Dec Balance W1: (4) 400
69 900 69 900
20X5
1 Jan Balance 400

Workings

W1: Balance on current tax payable/ (receivable) account

Balance at 31/12/X1 (1) 31/12/X2 (2) 31/12/X3 (3) 31/12/X4 (4)

Provided 56 000 58 000 65 000 67 400
Paid 54 000 59 000 62 500 67 000
2 000 (1 000) 2 500 400

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.7 continued . . .

a) Continued . . .

INCOME TAX EXPENSE (P/L)

20X1 C 20X1 C
31 Dec Current tax payable: income 56 000 31 Dec Profit or loss 56 000
tax
20X2 20X2
31 Dec Current tax payable: income 58 000 31 Dec Profit or loss 58 000
tax
20X3 20X3
19 May Current tax payable: income 1 500 31 Dec Profit or loss 66 500
tax (under-provision)
31 Dec Current tax payable: income 65 000
tax
66 500 66 500
20X4 20X4
31 Dec Current tax payable: income 67 400 18 April Current tax payable: income 200
tax tax (over-provision)
31 Dec Profit or loss 67 200
67 400 67 400

Workings

20X1 20X2 20X3 20X4

Assessment as per tax authorities 56 000 59 500 64 800
Provided 56 000 58 000 65 000
Under/(over) provision - 1 500 (200)
Assessment as per tax authorities 56 000 59 500 64 800
Total payments 54 000 59 000 62 500
Amount owing 2 000 500 2 300
Provided 56 000 58 000 65 000 67 400
Total payments 54 000 59 000 62 500 67 000
Statement of financial position liability (asset) 2 000 (1 000) 2 500 400

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.7 continued . . .

b) Disclosure

MISTY RIDGE LIMITED

STATEMENT OF FINANCIAL POSITION (extracts)
AT 31 DECEMBER 20X4
Note 20X4 20X3 20X2 20X1
C C C C
Current liabilities
Current tax payable 400 2 500 - 2 000

Current assets
Current tax receivable - - 1 000 0

MISTY RIDGE LIMITED

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X4
20X4 20X3 20X2 20X1
Note C C C C

Income tax expense 14 67 200 66 500 58 000 56 000

MISTY RIDGE LIMITED

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X4
20X4 20X3 20X2 20X1
C C C C
14 Income tax expense
Current tax
- Current year 67 400 65 000 58 000 56 000
- Prior year under / (over) provision * (200) 1 500 0 0
Tax expense per statement of comprehensive income 67 200 66 500 58 000 56 000

* As the tax expense has been increased by the under provision in 20X3 (in respect of 20X2) and decreased by the
over provision in 20X4 (in respect of 20X3), a tax rate reconciliation should be disclosed for both years. The standard
tax rates and the profit before tax were not provided in the question and therefore the rate reconciliation is not able
to be completed for the purposes of this question. A tax rate reconciliation is mandatory as per IAS 12 par 81(c).

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.9

a) Journals

Debit Credit
31 May 20X6
Income tax expense (SOCI: P/L) 26 500 - 25 000 1 500
Current tax payable/ receivable: income tax (SOFP: L/A) 1 500
Under provision for the prior year.

Income tax expense (SOCI: P/L) W1 29 960

Current tax payable/ receivable: income tax (SOFP: L/A) 29 960
Current income tax provided for the year

Dividends declared (OE) 10 000

Shareholders for dividends ( SOFP L) 10 000
Dividends declared during the year

Shareholders for dividends (SOFP L) 10 000 x 15% 1 500

Current tax payable: dividends tax (SOFP: L) 1 500
Dividends tax on dividends due as a result of declaration is withheld

b) Statement of comprehensive income

PLUM LIMITED
EXTRACT FROM THE STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MAY 20X6
Note C
Gross profit (Balancing: 109 000 + 40 000) 149 000

Operating expenses (40 000)

Operating profit (Balancing: 115 000 + 2 000 – 8 000) 109 000
Finance income 8 000
Finance costs (2 000)
Profit before taxation 115 000
Income tax expense (29 960 + 1 500) 12 (31 460)
Profit for the year 83 540
Other comprehensive income for the year 0
Total comprehensive income for the year 83 540

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.9 continued . . .

c) Statement of financial position

PLUM LIMITED
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION
AT 31 MAY 20X6

ASSETS C
Current assets
Current tax receivable: income tax W2 11 540

EQUITY AND LIABILITIES

Current liabilities
Shareholders for dividends 7 500
Current tax payable: dividends tax (2 250 + 1 500) 3 750

d) Notes to the financial statements: Income tax expense note

PLUM LIMITED
EXTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MAY 20X6
12. Income tax expense C
Current tax
- Current year W1 29 960
- Prior year under-provision Assessed: 26 500 – Expensed: 25 000 1 500
Tax expense per statement of comprehensive income 31 460

Tax rate reconciliation: %

Applicable tax rate (ATR) 28

Tax effects of:

Profit before tax 28.00 32 200
Exempt dividend (8 000 x 28% / /115 000) (1.95) (2 240)
Under-provision (1 500 / 115 000) 1.30 1 500
Tax expense per statement of comprehensive (31 460 / 115 000) 27.35 31 460
income / effective rate

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 Solutions to GAAP : Graded Questions Taxation: various types and current income tax

Solution 5.9 continued . . .

Workings:

W1: Current income tax expense

C
Profit before taxation 115 000
Exempt dividend income (8 000)
107 000
Temporary differences -
Taxable profit 107 000

Current income tax (C107 000 x 28%) 29 960 Dr TE; Cr CTP

W2: Current income tax payable

CURRENT TAX RECEIVABLE/PAYABLE: INCOME TAX

20X6 C 20X6 C
31 May Balance 43 000 31 May Income tax expense (Under- 1 500
(Given) provision: of PY current tax:
tax assessment: 26 500 – tax
provided: 25 000)
31 May Income tax expense 29 960
(CY current tax: W1)
Balance c/d 11 540
43 000 43 000
31 May Balance b/d 11 540

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