Imp Limited purchased an item of plant on 1 January 20X4. Details relating to the plant are:

Question

The plant cost R50 000, has a useful life of 10 years and a nil residual value.
In November 20X4, a competitor introduced a product that is similar to the product produced by the plant, for a much cheaper price. As a direct result, management reliably estimated the plant’s recoverable amount at 31 December 20x4 to be R27 000.
In 20X5, a consumer protection agency found that a similar product failed to meet certain regulations, and the product was removed from the market. As a result, management reliably estimated the plant’s recoverable amount at 31 December 20x5 to be R38 000.
The depreciation variables remained the same throughout the period.
The tax authorities grant a wear and tear allowance of 20% p.a. not apportioned for part of the year.
The corporate tax rate is 28%.
There are no other temporary differences, apart from those evident from the above.
Required:

Prepare the journal entries relating to deferred tax for the years ended December 20X4 and 20X5 year. Show all your workings.

Answer 1

Year ended 31 December 20X4:
Depreciation expense: R50,000 / 10 years = R5,000 per year
Tax depreciation: R50,000 x 20% = R10,000

Deferred tax liability at 31 December 20X4:
Temporary difference: Tax depreciation - Accounting depreciation = R10,000 - R5,000 = R5,000
Deferred tax liability: R5,000 x 28% = R1,400

Journal entry:
Debit Depreciation expense: R5,000
Credit Accumulated depreciation: R5,000
Debit Deferred tax liability: R1,400
Credit Taxation payable: R1,400

Year ended 31 December 20X5:
Depreciation expense: R50,000 / 10 years = R5,000 per year
Tax depreciation: R50,000 x 20% = R10,000

Deferred tax liability at 31 December 20X5:
Temporary difference: Tax depreciation - Accounting depreciation = R10,000 - R5,000 = R5,000
Deferred tax liability: R5,000 x 28% = R1,400

Journal entry:
Debit Depreciation expense: R5,000
Credit Accumulated depreciation: R5,000
Debit Deferred tax liability: R1,400
Credit Taxation payable: R1,400