Chartered Accountants Program

Financial Accounting & Reporting

WE

Unit 4: Income taxes

Worked example 4.1

Calculating the current tax liability

Introduction
Calculating the current tax liability for an entity requires careful consideration of the differences
between the tax treatment and the accounting treatment of items, before accounting for the
current tax liability in accordance with IAS 12 Income Taxes.
This worked example links to unit learning objective:
• Calculate and account for current tax.

At the end of this worked example, you will be able to calculate the current tax liability of an
entity and prepare relevant journal entries in accordance with IAS 12.
This worked example is continued in worked example 4.3, but it is recommended that you
attempt this one first.
It will take you approximately 30 minutes to complete.

Scenario
Bob Jones is the financial controller of Flip Limited (Flip).
Bob has prepared a summary of Flip’s internal financial information for the year ended 30 June
20X3, and is ready to prepare the current tax liability. The summary is as follows:

Internal statement of profit or loss for the year ended 30 June 20X3

Item Note $ $

Sales revenue 1 420,000

Interest revenue 2 80,000

Government grant income 3  20,000

Total revenue and other income 520,000

Expenses

Depreciation 4 10,000

Warranty 5 40,000

Fines 6 5,000

Other expenses 320,000

Total expenses (375,000)

Accounting profit before income tax 145,000

fin12204_we_01

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Extract of internal statement of financial position at 30 June 20X2 and 30 June 20X3

Item Note 30.06.X3 30.06.X2

$ $

Assets

Cash 60,000 45,000

Interest receivable 2 45,000 0

Plant and equipment – cost 4 140,000 90,000

Plant and equipment – accumulated 4 (40,000) (30,000)

depreciation

Liabilities

Trade payables 30,000 22,000

Contract liability 1 15,000 8,000

Warranty provision 5 42,000 20,000

Notes
1. The contract liability relates to revenue that is received in advance. It is assessable for tax purposes when received.
Cash received in the year ended 30 June 20X3 is $15,000. When the item is recognised for accounting purposes under
IFRS 15 Revenue from Contracts with Customers, it is included in sales revenue.
2. Interest revenue includes $45,000 that is not assessable for tax purposes until the year ending 30 June 20X4.
3. A government business incentive grant totalling $20,000 was accounted for correctly as income during the year.
The grant is never assessable for tax purposes.
4. The tax written-down value at 30 June 20X3 is $60,000 and $30,000 at 30 June 20X2. There have been no disposals
of plant and equipment during the year and the tax depreciation deduction is $20,000 for the year ended
30 June 20X3.
5. Warranty costs are deductible for tax purposes when paid.
6. Fines are not deductible for tax purposes.
7. The accounting treatment of accounts or transactions is assumed to be the same as the taxation treatment unless
otherwise indicated.
Flip’s tax rate is 30%.

Task
The directors of Flip have asked Bob to calculate and prepare the journal entry to record Flip’s
current tax liability for the year ended 30 June 20X3.

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Solution
Bob worked through the following steps to complete the task.

Step 1 – Review the Standard and determine the approach

Bob reviewed IAS 12 para. 5 for the definition of current tax. He also noted that para. 12
required current tax to be recognised as a liability to the extent that it is unpaid at the year end.
Bob knew that the common method of calculating the current tax liability is to calculate the
taxable income by adjusting the accounting profit before tax, then multiplying the taxable
income by the tax rate.

Step 2 – Set up a worksheet to calculate the current tax liability

Bob set up a worksheet to calculate the current tax liability. He started with the accounting
profit for the period and noted the categories of adjustments that may be identified from the
financial information for the period. These categories were as follows:
• Items where the tax and accounting treatments are never the same (non-temporary
difference adjustments).
• Items where tax and accounting treatments are the same, but in different periods
(temporary difference adjustments). Bob knew this information would be useful later when
he performs deferred tax calculations (in Worked example 4.3)
• Equity or other comprehensive income (OCI) differences affecting taxable income.

Worksheet to calculate current tax liability at 30 June 20X3

Item $ $

Accounting profit before tax 145,000

1. Non-temporary difference adjustments

2. Temporary difference adjustments

3. Equity or OCI adjustments affecting taxable income

Taxable income

Current tax liability at 30%

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Step 3 – Identify the items that require adjustment in the calculation

of taxable income
Bob reviewed the statement of profit or loss and the extract from the statement of financial
position to identify items where the accounting treatment is different from the treatment for
tax purposes. He categorised the items and summarised that adjustments are required for
the following:

Nature of adjustment Items requiring adjustment

1. Items where the tax and accounting Fines

treatments are never the same (non- Government grant
temporary difference adjustments)

2. Items where tax and accounting Interest revenue

treatments are the same but in Depreciation
different periods (temporary difference
adjustments) Warranty costs
Contract liability

3. Equity or OCI differences No adjustments

Step 4 – Calculate the adjustments required to complete the

calculation of taxable income and current tax liability
Bob dealt with each item in turn. He totalled up the worksheet to calculate the taxable income
and the current tax liability.
Please note that an explanation of each treatment has been provided to aid understanding but
was not required to complete the worksheet.

Worksheet to calculate current tax liability at 30 June 20X3

Item Explanation of treatment $ $

Accounting profit before tax 145,000

1. Non-temporary difference
adjustments

Fines The fines are an expense for 5,000

accounting purposes and were
therefore a debit, reducing profit.
As they are not allowable as a
tax deduction, they need to be
added back to undo the expense
recognised in the accounting
profit

Government grant income The grant is income for (20,000)

accounting purposes, but will
never be assessable for tax and
needs to be subtracted

(15,000)

2. Temporary difference
adjustments

Interest revenue The interest revenue included (45,000)

in accounting profit is not
assessable for tax purposes until
the year ending 30 June 20X4
and needs to be subtracted

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Worksheet to calculate current tax liability at 30 June 20X3

Item Explanation of treatment $ $

Accounting depreciation The item is an expense for 10,000

accounting purposes but is not
allowable as a tax deduction and
needs to be added back

Tax depreciation The deduction for tax (20,000)

depreciation needs to be
subtracted

Warranty expense The item is an expense for 40,000

accounting purposes but is not
allowable as a tax deduction and
needs to be added back

Warranty payments made1 The deduction for warranty (18,000)

payments made needs to be
subtracted

Contract liability from 20X2 and The contract liability balance (8,000)
recognised in 20X3 profit at 30 June 20X2 was assessable
for tax in the 30 June 20X2
year when it was received. It
is recognised as revenue in
accounting profit in the year
ended 30 June 20X3. It should
not be included in the taxable
income as it has already been
taxed and needs to be subtracted
to undo the revenue recognised
in the accounting profit

Contract liability in 20X3 that is The contract liability balance at  15,000

assessable for tax 30 June 20X3 arose because the
amount was received during the
current year. However, it has not
yet been recognised as revenue
in the accounting profit. It is
assessable for tax in the 30 June
20X3 year and needs to be added
to the accounting profit to arrive
at taxable income

 (26,000)

3. Equity or OCI adjustments

affecting taxable income

Taxable income 104,000

Current tax liability at 30%  31,200

Note 1.
Calculation of the warranty amounts paid during 20X3:

Warranty provision

$ $

Cash (balancing item) 18,000 Opening balance 20,000

Closing balance 42,000 Warranty expense 40,000

60,000 60,000

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Alternatively, the warranty amounts paid during 20X3 can be calculated as:

Opening provision + Expense in period – Closing provision = Amount paid in year

$20,000 + $40,000 – $42,000 = $18,000

Step 5 – Prepare the journal entry to record the current tax liability
Using the figure calculated in the worksheet, Bob was able to record the journal entry for the
current tax liability at 30 June 20X3.

Date Account description Dr Cr

$ $

30.06.X3 Income tax expense1 31,200

Current tax liability 31,200

To record the current tax liability

Note 1. The debit is made to income tax expense. This is because the underlying transactions
were all recognised in profit (and not in other comprehensive income or equity).

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Worked example 4.2

Calculating current and deferred tax: an
overview
This worked example is presented as an excel spreadsheet which you can work your way
through to understand the basics of how current and deferred tax issues interrelate. The
spreadsheet is on myLearning in the Unit 4 folder.

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Worked example 4.3

Calculating deferred tax assets and liabilities

Introduction
Accounting for deferred tax assets (DTAs) and deferred tax liabilities (DTLs) requires
consideration of temporary differences and any opening deferred tax balances calculated in
accordance with IAS 12 Income Taxes. As a Chartered Accountant, you may be required to
account for deferred tax in accordance with IAS 12.
This worked example links to unit learning objective:
• Calculate and account for deferred tax.

This worked example follows on from worked example 4.1. It is recommended that you attempt
worked example 4.1 first as you will need that information to complete this worked example.
At the end of this worked example, you will be able to calculate and record DTAs and DTLs
arising from temporary differences, in accordance with IAS 12.
It will take you approximately 45 minutes to complete.

Scenario
Bob Jones is the financial controller of Flip Limited (Flip).
Bob is preparing the financial statements for the year ended 30 June 20X3 and is currently
working on the tax calculations. Bob has calculated a taxable income of $104,000 by adjusting
the accounting profit before tax. Based on this, he has prepared the journal entry for the current
tax liability of $31,200.
At 30 June 20X2, the DTL and DTA were $9,000 and $8,400 respectively, both of which satisfied
the IAS 12 recognition criteria.
Flip’s tax rate is 30%.

Task
The directors have asked Bob to prepare the deferred tax journal entry for Flip for the year
ended 30 June 20X3.

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Solution
Bob worked through the following steps to complete the task.

Preliminary step – Review the Standard

Bob reviewed IAS 12 to identify information relevant to his task. Once he understood the IAS 12
requirements, Bob was able to work through the steps to complete the task of preparing the
deferred tax journal entry.

IAS 12 paragraphs relevant to the task

Item Definition Guidance

Tax base Para. 5 Paras 7–10

Taxable temporary differences Para. 5 Paras 15 and 16

Deductible temporary differences Para. 5 Paras 24 and 25

DTLs Para. 5 Paras 15, 47, 51, 53

DTAs Para. 5 Paras 24, 47, 51, 53, 56

Step 1 – Calculate temporary differences at the end of the reporting

period
Bob recalled the following facts:
• Temporary differences arise when a transaction or event is recognised in a different period
in the financial statements, rather than when they are recognised for taxation purposes.
• IAS 12 adopts what is effectively a ‘balance sheet’ approach with temporary differences.
The carrying amount of an asset or liability in the statement of financial position is
compared with its tax base to determine the future tax consequences that must be accounted
for under IAS 12.

To identify the assets and liabilities at 30 June 20X3 where the tax base and the accounting
carrying amount were different, giving rise to a temporary difference, Bob examined the
following items:
• The assets and liabilities included in the extract of the internal statement of financial
position at 30 June 20X3.
• The worksheet to calculate the current tax liability at 30 June 20X3 as item 2 in the
worksheet were temporary difference adjustments.

He identified that the treatment of the items included as cash and trade payables is the same
for tax and accounting purposes for Flip; and therefore, these items did not give rise to a
temporary difference.
He established that the items which would have a temporary difference were:
• Interest receivable
• Plant and equipment
• Contract liability
• Warranty provision.

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Bob calculated the temporary differences at 30 June 20X3 by subtracting the tax base of the item
from its carrying amount, as follows:

Calculation of temporary differences at 30 June 20X3

Item Carrying amount Tax base Temporary difference

$ $ $

Interest receivable 45,000 01 45,000

Plant and equipment 100,000 60,0002 40,000

Contract liability 15,000 03 15,000

Warranty provision 42,000 04 42,000

Note Tax base calculation

Formula-based approach OR Notional tax balance sheet

approach

1. Interest receivable, $45,000 carrying amount – If a tax balance sheet was

$0 tax base $45,000 future taxable amounts prepared, there would not be
(capped at the asset’s carrying an interest receivable asset.
amount at the reporting date) + Interest is assessable for tax when
$0 future deductible amounts received in cash, not carried
forward. Therefore, the tax base
is zero

2. Plant and equipment, $100,000 carrying amount – If a tax balance sheet was
$60,000 tax base $100,000 future taxable amounts prepared, the plant and
(capped at the asset’s carrying equipment’s $60,000 tax written
amount) + $60,000 in future down value would be recognised
deductible amounts

3. Contract liability, $15,000 carrying amount – If a tax balance sheet was

$0 tax base $15,000 revenue not taxable in prepared, the contract liabilty
future periods (the accounting would not be recognised, as
balance sheet tells us that this the amount has already been
revenue has been received in assessed for tax purposes when
cash already. When received in it was received in cash. Therefore,
cash, it was assessable for tax at the tax base is zero
that point. So the amount on
the accounting balance sheet of
$15,000 will not be taxable in the
future when it is recognised as
accounting revenue.)

4. Warranty provision, $42,000 carrying amount – If a tax balance sheet was

$0 tax base $42,000 in future deductible prepared, there would not be
amounts (the accounting balance a warranty provision liability.
sheet tells us we are going to Warranty costs are a deduction on
pay $42,000 warranty costs in a cash basis, not carried forward.
the future. When paid in cash, Therefore, the tax base is zero
this will become a tax deduction.
So the future deductible amount
is $42,000.) + $0 future taxable
amounts (as a liability will not
be taxable)

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Step 2 – Allocate temporary differences

Once the temporary difference for each item had been calculated, Bob determined whether each
item resulted in a taxable temporary difference or a deductible temporary difference.

Allocation of temporary differences

Item Carrying Tax base Temporary Applicable rule Taxable temporary

amount difference difference (TTD)
or Deductible
temporary difference
$ $ $ (DTD)

Interest 45,000 0 45,000 Asset rule: $45,000 TTD

receivable Carrying amount >
tax base

Plant and 100,000 60,000 40,000 Asset rule: $40,000 TTD

equipment Carrying amount >
tax base

Contract liability 15,000 0 15,000 Liability rule: $15,000 DTD

Carrying amount >
tax base

Warranty 42,000 0 42,000 Liability rule: $42,000 DTD

provision Carrying amount >
tax base

Step 3 – Calculate deferred tax balances at the end of the reporting

period
Bob created a table to input the relevant information from the previous steps. He completed the
table to calculate the deferred tax balances at the end of the reporting period.

Calculation of deferred tax balances as at 30 June 20X3

Item Carrying Tax base TTD DTD

amount
$ $ $ $

Interest receivable   45,000 0 45,000     0

Plant and equipment 100,000 60,000 40,000 0

Contract liability (15,000) 0 0 15,000

Warranty provision (42,000)      0     0 42,000

Total temporary differences 85,000 57,000

DTL/DTA at 30% 25,500 17,100

Step 4 – Apply recognition criteria

Bob examined the criteria for recognising a deferred tax asset and deferred tax liability and
concluded that Flip continues to satisfy the IAS 12 requirements at 30 June 20X3.

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Step 5 – Calculate movement in deferred tax balances

Bob knew that the opening balances in the deferred tax asset and liability accounts would
carry forward from the previous year. Therefore, he needed to determine the movement in the
deferred tax balances from 30 June 20X2 to 30 June 20X3 as the movement would be recorded
in the journal entry. He determined the movement by subtracting the opening balance in the
deferred tax asset and liability accounts.

Calculation of deferred tax as at 30 June 20X3

Item Carrying Tax base TTD DTD

amount $ $

$ $

Interest receivable   45,000 0   45,000     0

Plant and equipment 100,000 60,000 40,000 0

Contract liability (15,000) 0 0 15,000

Warranty provision (42,000)      0     0 42,000

Total temporary differences 85,000 57,000

DTL/DTA at 30% 25,500 17,100

Less: opening balances (9,000) (8,400)

Movement 16,500  8,700

Step 6 – Prepare journal entry

Bob recorded the journal entry based on the movement calculated in Step 5.

Date Account description Dr Cr

$ $

30.06.X3 DTA 8,700

DTL 16,500

Income tax expense 1

7,800

To record the movement in the deferred tax balances at 30 June 20X3

Note 1. The debit is made to income tax expense. This is because the underlying transactions
were all recognised in profit, and not in other comprehensive income or equity.
Note to candidates: The following information was not needed to answer the required:
Therefore, the balances in the DTL and DTA accounts after recording this journal entry are:

DTL DTA

$ $

Opening balance 9,000 8,400

Movement from journal entry 16,500 8,700

Closing balance (as calculated in Step 3) 25,500 17,100

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Worked example 4.4

Accounting for carryforward tax losses

Introduction
A tax loss can be carried forward for recovery in future periods. As a Chartered Accountant,
you may have to record the carryforward of a tax loss and account for the recovery of that loss
in a future period.
This worked example links to unit learning objective:
• Calculate and account for deferred tax.

At the end of this worked example, you will be able to account for a tax loss in accordance with
IAS 12 Income Taxes.
It will take you approximately 10 minutes to complete.

Scenario
Trish Mondal is the financial accountant for Sprint Surf Limited (Sprint Surf).
During the year ended 30 June 20X2, Sprint Surf incurred a tax loss of $20,000. The loss was due
to a write-off of a major debtor, and Sprint Surf anticipated that sufficient taxable profits would
be generated in future periods to utilise the loss.
The tax rate for Sprint Surf is 30%.

Tasks
Kevin Morphus, the chief financial officer (CFO) of Sprint Surf, has asked Trish to prepare the
journal entries to:
A. Recognise the deferred tax relating to the tax loss as at 30 June 20X2.
B. Record the recoupment of the tax loss during the year ended 30 June 20X3, assuming that the
tax loss carried forward is offset against the taxable income for the year ended 30 June 20X3.

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Solution
Trish worked through the following steps to complete the task.

Part A
Step 1 – Review the Standard
Trish reviewed IAS 12 and noted that paras 34–36 are relevant to the task.

Step 2 – Determine the deferred tax balance arising from the tax loss incurred
Trish determined that the tax loss gives rise to a deferred tax asset (DTA), as the recovery of the
tax loss will result in lower tax in the future. She anticipated that sufficient taxable profits will
be generated in future periods to utilise the tax loss and, therefore, the DTA can be recognised.
The amount of the DTA arising as a result of the tax loss incurred is $6,000 ($20,000 × 30%).

Step 3 – Prepare the journal entry

Trish recorded the journal entry for the DTA relating to the tax loss.

Date Account description Dr Cr

$ $

30.06.X2 Deferred tax asset (DTA) 6,000

Income tax expense 6,000

To record the DTA for the tax loss

Part B
Step 1 – Determine the appropriate accounting treatment
Trish noted that as the tax loss has now been utilised, the DTA in relation to the tax loss must
be derecognised. The impact of this is to reduce the current tax liability for the year ended
30 June 20X3.

Step 2 – Prepare the journal entry to record the recoupment of the tax loss
during the year ended 30 June 20X3
Trish prepared the journal entry to record the recoupment of the tax loss in the year ended
30 June 20X3.

Date Account description Dr Cr

$ $

30.06.X3 Current tax liability 6,000

DTA 6,000

To record the reduction in tax liability due to recoupment of the prior period tax loss
previously booked as a DTA

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Worked example 4.5

Accounting for an underprovision of
income tax

Introduction
Calculating the current tax liability for an entity in accordance with IAS 12 Income Taxes (IAS 12)
usually takes place shortly after the end of the reporting period, while the entity’s income tax
return may be prepared and lodged with the taxation authority several months later. Upon
preparing the income tax return, it is possible that the current tax liability differs from the
amount calculated when the tax entries were prepared. Similarly, the taxation authority may
decide that the taxable income is different from the amount calculated by the entity that has
been used as the basis for calculating its current tax liability.
This worked example links to unit learning objective:
• Explain and account for changes in prior year taxes.

At the end of this worked example you will be able to prepare a journal entry to account for an
underprovision of income tax in accordance with IAS 12.
It will take you approximately 15 minutes to complete.

Scenario
Javier Alvarez is the financial controller of Mavis Limited (Mavis). He had calculated the
company’s current tax liability at 30 June 20X2 to be $663,500. The annual income tax return was
lodged with the relevant taxation authority on 15 December 20X2.
On 1 February 20X3, Mavis received an amended assessment notice from the taxation authority.
It stated that the actual tax liability of the company for the year ended 30 June 20X2 was
$679,250. As a result, Mavis was required to pay further tax of $15,750 by 31 March 20X3.
The difference between the amount Javier calculated for Mavis and the amount the taxation
authority assessed arose due to the following:
1. The taxation authority disallowed a deduction of $7,500 that Mavis had claimed in relation
to a donation.
2. The taxation authority assessed the appropriate tax depreciation rate for a building Mavis
held to be 5% on a straight-line basis. Mavis had applied a straight-line rate of 12.5% when
preparing the income tax return. The building was acquired on 1 January 20X2 at a cost of
$1.2 million and is being depreciated at a rate of 12.5% on a straight-line basis for financial
reporting purposes.
The tax rate is 30%.

Task
Javier needs to prepare the journal entry to recognise the impact on the current tax liability as a
result of the amended assessment Mavis received on 1 February 20X3.

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Solution
Javier worked through the following steps to complete the task.

Step 1 – Review the relevant Standards

Javier reviewed:
• IAS 12 para. 5 for the definitions of current tax, temporary differences, deferred tax assets
and tax expense and he noted that ‘current tax’ is defined as ‘the amount of income taxes
payable (recoverable) in respect of the taxable profit (tax loss) for a period’. He also read
para. 12, which states that ‘current tax for current and prior periods shall, to the extent
unpaid, be recognised as a liability’.
• He also reviewed paras 5 and 42 of IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors and noted that the definition of prior period error from para. 5 is as follows:

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for
one or more prior periods arising from a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements.

Javier also read para. 42, which states that:

Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in the
first set of financial statements authorised for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening balances
of assets, liabilities and equity for the earliest prior period presented.

Step 2 – Decide whether retrospective adjustment needs to be made

for the errors
Javier concluded that the adjustments made by the taxation authority arose because of errors
made in preparing the income tax return which had been reflected in the current tax liability
calculation. Had a closer examination and/or review of the current tax liability calculation been
made, the donation would have been added back as being non-deductible, and the correct tax
depreciation rate would have been applied in relation to the building.
Javier also concluded that the error in the calculation of the current tax liability is not material,
so he would not have to restate the comparatives by adjusting opening retained earnings at
1 July 20X2. Instead, any impact of correcting the error can be recorded through profit or loss in
the current year.
In addition, Javier concluded that IAS 8 para. 43, which provides an exception to retrospective
adjustments in limited situations, did not apply as he was able to determine the period-specific
effects of the errors were immaterial.

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Step 3 – Identify the nature of the errors in the current tax liability
calculation
Javier knew that, following the requirements of IAS 12 para. 12, he would need to adjust the
current tax liability that was recorded in the statement of financial position at 30 June 20X2.
The current tax liability recorded was understated and he needed to recognise, as a liability,
the full amount of current tax for the prior period to the extent that it was still unpaid.
He read the details on the amended assessment notice from the taxation authority and
categorised the impact of the adjustments, as follows:
Adjustments to current tax liability are recognised by adjusting income tax expense when:

Change relates to a one-off Change relates to a

adjustment that has no future temporary difference, unless
taxation consequences, unless the underlying transaction
the underlying transaction was was accounted for outside of
accounted for outside of profit profit or loss
or loss

Error – deduction for donation denied X

Error – incorrect tax depreciation rate X

applied to the cost of the building

As neither of the underlying transactions was accounted for outside of profit or loss, the
adjustment to the current tax liability would be recognised by adjusting income tax expense.

Step 4 – Calculate the amount of the underprovision of the current

tax liability
Javier created a table to quantify the errors made regarding the donation and the depreciation.
Quantification of errors in current tax liability calculation

Error Impact on Impact on Nature of Account

taxable income current tax change impacted
liability (reduced
deduction × 30%
tax rate)

Donation not allowed Increases taxable $2,250 increase Non-temporary Income tax
as a deduction income by difference expense
$7,500 adjustment

Reduction of tax Increases taxable $13,500 increase Temporary Deferred tax

deduction due to income by difference asset2
lower tax depreciation $45,0001
rate for building

Notes
1. Calculated as follows:

Tax deduction claimed ($1.2 million × 12.5% × ½ year) 75,000

Tax deduction allowed by the tax authority (30,000)

($1.2 million × 5% × ½ year)

Excess tax deduction denied 45,000

2. The carrying amount of the building for financial reporting purposes is $1,125,000 ($1,200,000 – $75,000) and does not
change as a result of the tax error. At 30 June 20X2 the tax base had also been calculated to be $1,125,000 ($1,200,000
– $75,000) and there would have been no temporary difference recognised for the building at 30 June 20X2.
However, the lower tax depreciation rate will increase the tax base of the building to $1,170,000 ($1,200,000 – $30,000)
As the $1,170,000 tax base of the building exceeds the $1,125,000 carrying amount, there is a $45,000 deductible
temporary difference. Accordingly, a $13,500 deferred tax asset ($45,000 × 30%) needs to be recognised when correcting
the error.

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Step 5 – Prepare the journal entry

Using the figures calculated in the table, Javier recorded the journal entry to correct the current
tax liability.

Date Account description Dr Cr

$ $

1.02.X3 Income tax expense 2,250

Deferred tax asset 13,500

Current tax liability 15,750

To record the increase in the current tax liability arising under the amended assessment notice
relating to the year ended 30 June 20X2

Page 4-20 Worked examples – Unit 4