DEFERRED TAX - COMPREHENSIVE EXAMPLE

Fable Ltd presents you with the following set of financial statements, presented in terms of GAAP, with
certain additional information:
Balance sheet as at 31 December 2008
2008
R
Assets
Non-current assets
PPE
Intangible assets
Other financial assets
Deferred tax

???

1 710 530

1 321 891
357 000
521 978
???

1 102 543
275 000
332 987
0

???

2 292 173

999 862
1 132 456
???

885 372
1 001 672
405 129

???

4 002 703

???

962 151

10 000
90 000
???

10 000
90 000
862 151

???

1 637 156

1 189 876
598 899
???

888 671
671 561
76 924

???

1 403 396

987 786
105 467
???
87 671

851 072
101 782
286 981
163 561

???

4 002 703

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings
Non-current liabilities
Other financial liabilities
Finance lease obligations - long term portion
Deferred tax

2007
R

Current liabilities
Trade and other payables
Finance lease obligations - current portion
Taxation owing
Bank overdraft
Total equity and liabilities
Statement of comprehensive income for the year ended 31 December 2008
2008
R

2007
R

12 378 921
(8 902 178)
3 476 743
98 671
(2 976 589)
(289 768)
43 210
352 267
???
352 267

Revenue
Cost of sales
Gross profit
Other income
Other expenses
Finance costs
Share of profit from associate
Profit/(loss) before tax
Taxation
Profit/(loss) for the year

10 135 798
(6 731 258)
3 404 540
101 832
(2 408 981)
(240 898)
0
856 493
(245 756)
610 737

No dividends have been paid in 2007 or 2008.

Additional information:
1

Deferred tax in 2007 (tax rate of 29%) was calculated as follows:

PPE
Intangible assets
Investment in listed shares
Trade receivables
Prepayments - rent
Finance lease obligations
Rent received in advance

Acc
1 102 543
275 000
332 987
901 672
100 000
(773 343)
(30 000)

Tax
361 036
90 000
100 000
976 074
0
0
0

Diff
741 507
185 000
232 987
(74 402)
100 000
(773 343)
(30 000)
381 749

D/tax
215 037
53 650
33 783
(21 577)
29 000
(224 269)
(8 700)
76 924

cr
cr
cr
dr
cr
dr
dr
cr

No deferred tax for current year has been calculated as the new accountant is useless at
calculating the thingbut he does have the following information.

Included in other income is the following:

Dividends received - listed shares
Fair value adjustment in respect of listed shares

50 000
45 781

Included in other expenses is:

Depreciation
Depreciation on financed assets (included above)
Amortisation of intangible assets
Legal fees - debt collection
Legal fees - contract to purchase investment in sub

The company sold no items of property, plant and equipment during the year. Company has
estimated its wear and tear for 2008 at R402 556.

Finance costs include R135 342 in connection with finance lease obligations. The finance lease
payments for the year total R178 565.

During the year the company purchased new intangibles (patents) for R158 341. SARS allows
a write off of 10% per annum based on cost (no apportionment for part of the year). The original
cost of the other intangible assets was R300 000.

Other financial assets comprises listed shares (policy is fair value through profit/loss). During the
current year the company purchased an investment in an associate for R100 000. This is included
in the investments in listed shares figures in 2008 [Company intends holding shares for capital gain]

Trade receivables includes R110 000 of rent prepaid, and R20 000 of prepaid insurance. The trade
debtors allowance for credit losses has remained unchanged for the past 3 years at R99 430.

10 Other financial liabilities consists of a loan to a related party.

11 Rent received in advance has remained unchanged from 2007.
12 The tax rate changed during the year to 28%. Taxes paid during the year are 1st 2008 of R100 000
and a 2nd 2008 of R125 000.
Required:
Prepare the following:
- the TAX balance sheet as at 31 December 2008 (with comparatives)
- compute the taxation expense in the income statement
- compute the deferred tax balance at 31 December 2008
- complete the missing items in the accounting balance sheet as at 31 December 2008

387 456
86 554
76 341
27 931
46 781

Solution:
Tax balance sheet as at 31 December 2008
2008
R
Assets
Non-current assets
PPE
Intangible assets
Other financial assets
Deferred tax

[361036+606804-402556]
[90000+158341-(300000*10%)-(158341*10%]
[100000+100000]
[none]

Current assets
Inventories
Trade and other receivables

Cash and cash equivalents

[given]
[1132456-130000+99430-(99430*25%]
[calc - refer below]

Total assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings

[given]
[given]
[2007=862151-381749+76924]

2007
R
967 791

551 036

565 284
202 507
200 000
0

361 036
90 000
100 000
0

2 166 726

2 266 575

999 862
1 077 029
89 835

885 372
976 074
405 129

3 134 516

2 817 611

780 575

657 326

10 000
90 000
680 575

10 000
90 000
557 326

1 189 876

888 671

1 189 876
0
0

888 671
0
0

1 164 065

1 271 614

957 786
0
118 608
87 671

821 072
0
286 981
163 561

3 134 516

2 817 611

[2008=1096632-554140+110082]

Non-current liabilities
Other financial liabilities
Finance lease obligations - long term portion
Deferred tax

[given]
[none]
[none]

Current liabilities
Trade and other payables
Finance lease obligations - current portion
Taxation owing
Bank overdraft

[987786-30000]
[none]
[calc - refer below]
[given]

Total equity and liabilities

Deferred tax calculation 2008:

PPE
Intangible assets
Investment in listed shares
Trade receivables
Prepayments - rent/insurance
Finance lease obligations
Rent received in advance

Acc
1 321 891
357 000
521 978
1 002 456
130 000
(704 366)
(30 000)

Tax
565 284
202 507
200 000
1 077 029
0
0
0

Diff
756 607
154 493
321 978
(74 573)
130 000
(704 366)
(30 000)
554 140

D/tax
211 850
43 258
45 077
(20 880)
36 400
(197 222)
(8 400)
110 082

cr
cr
cr
dr
cr
dr
dr
cr

Normal tax calculation 2008:

Profit before tax
Add: non-deductible expenses:
- depreciation
- amortisation of intangibles
- legal fees - contract
- finance costs on finance leases
- prepaid 2007
- rent received in advance 2008
- allowance for credit losses 2008
- provision for doubtful debts @ 25% 2007
Less: non-taxable income/allowances:
- dividends received
- fair value adjustments
- wear and tear
- allowance on intangibles
- payments i.r.o. finance leases
- prepaid 2008
- rent received in advance 2007
- share of associate profit
- allowance for credit losses 2007
- provision for doubtful debts @ 25% 2008

352 267
387 456
76 341
46 781
135 342
100 000
30 000
99 430
24 858

[(300000*10%)+(158341*10%)]

(50 000)
(45 781)
(402 556)
(45 834)
(178 565)
(130 000)
(30 000)
(43 210)
(99 430)
(24 858)
202 241

Taxable income

56 627

Tax at 28%
The taxation expense account in income statement is as follows:
Normal tax - current year
Deferred tax
Change in rate

56 627
35 811
(2 653)
89 786

[as above]
[110082-76924+2653]
[calc shown in class]

Balance sheet as at 31 December 2008 (COMPLETED)

2008
R
Assets
Non-current assets
PPE
Intangible assets
Other financial assets
Deferred tax
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

[balancing figure]

Total assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings

[862151+352267-89786]

Non-current liabilities
Other financial liabilities
Finance lease obligations - long term portion
Deferred tax

[calc above]

Current liabilities
Trade and other payables
Finance lease obligations - current portion
Taxation owing
Bank overdraft
Total equity and liabilities

[286981+84627-100000-125000]

2007
R

2 200 869

1 710 530

1 321 891
357 000
521 978
0

1 102 543
275 000
332 987
0

2 222 153

2 292 173

999 862
1 132 456
89 835

885 372
1 001 672
405 129

4 423 022

4 002 703

1 224 632

962 151

10 000
90 000
1 124 632

10 000
90 000
862 151

1 898 857

1 637 156

1 189 876
598 899
110 082

888 671
671 561
76 924

1 299 532

1 403 396

987 786
105 467
118 608
87 671

851 072
101 782
286 981
163 561

4 423 022

4 002 703