Tutorial Week 5 Blackboard Questions and Solutions 1 Chapter 6: Accounting for income tax REVIEW QUESTIONS 4. Explain the meaning of the tax base for an asset, and distinguish the tax base from an asset’s carrying amount. 5. How does the tax base for an asset differ from the tax base for a liability? 112. The tax base for a liability is discussed in para 8. See Section 6.4.2 of the text for further discussion. 6. In tax-effect accounting, creation of temporary differences between the carrying amount and tax base for assets and liabilities leads to the establishment of deferred tax assets and liabilities in the accounting records. List examples of temporary differences that create (a) deferred tax assets and (b) deferred tax liabilities. (a) Deferred tax assets occur when for assets the Carrying Amount < Tax Base, or when the future taxable amount < future deductible amount. Examples would be where a company has accounts receivable with an allowance for doubtful debts, or where the tax depreciation rates are less than the accounting depreciation rates. Deferred tax assets also occur when for liabilities the Carrying Amount > Tax Base. Examples would be provision for employee benefits or provisions for warranty. (b) Deferred tax liabilities occur when for assets when the Carrying Amount > Tax Base, when the future taxable amount > future deductible amount. Examples would be revenue receivable, prepaid expenses or where the tax depreciation rates are greater then the accounting depreciation rates in the early years of an asset’s life. Deferred tax liabilities also occur when for liabilities the Carrying Amount < Tax Base. There doesn’t appear to be any examples for this situation.