As noted above in addition to the capital gain

cost of $40 000) is taxable. As noted above, in addition to the capital gain, because this is a
depreciable asset, any tax depreciation recouped from the sale of the asset is also taxable.
Tax depreciation recouped is equal to any remaining proceeds of sale, after capital gains,
in excess of the tax written down amount of the asset.
As shown below, there is a taxable temporary difference of $35 000 associated with the
recovery of the asset. The taxable temporary difference can be disaggregated between
the $5000 capital gain and $30 000 recoupment of depreciation:
Recovery by sale $ $
Sales proceeds (recovery of cost of
$40 000 plus $5000 capital gain) 45 000
Less: Tax written-down cost
Cost 40 000
Depreciation (30 000) (10 000)
Taxable temporary difference 35 000
The deferred tax liability is $35 000 × 30% = $10 500.

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FINANCIAL REPORTING
Question 4.12
Part A
Construct a table identifying all taxable and deductible temporary differences for AAA Ltd for
the year ending 31 December 20X1, and a table identifying all taxable and deductible temporary
differences for AAA Ltd for the year ending 31 December 20X2.
The tables should include the carrying amounts of the assets and liabilities, their corresponding
tax bases and the two types of temporary differences: taxable and deductible. The bottom section
of the table should illustrate the calculation of the deferred tax asset and liability for the year.
Part B
How would the answer for the year ended 31 December 20X2 differ if the tax rate changed from
30 per cent to 25 per cent in 20X2?
Part A
Taxable Deductible
Carrying temporary temporary
amount Tax base difference difference
20X1 $ $ $ $
Receivable 55 000 — 55 000
Inventory 2 000 2 000
Investments 33 000 33 000
Buildings 24 000 20 000 4 000
Plant and equipment 10 000 10 000
Warranty obligations 10 000 — 10 000
Goodwill 10 000 10 000
Accounts payable 500 500
Long-term debt 20 000 20 000
Total 59 000 10 000
Deferred tax liability (× 30% tax rate) 17 700
Deferred tax asset (× 30% tax rate) 3 000
Taxable Deductible
Carrying temporary temporary
amount Tax base difference difference
20X2 $ $ $ $
Receivable — —
Inventory 2 000 2 000
Investments 33 000 33 000
Buildings (refer to Table 4.17) 36 000 10 000 26 000
Plant and equipment 10 000 10 000
Warranty obligations — —
Goodwill 10 000 10 000
Accounts payable 500 500
Long-term debt 20 000 20 000
Total 26 000 0
Deferred tax liability (× 30% tax rate) 7 800
Deferred tax asset (× 30% tax rate) 0

STUDY GUIDE QUESTIONS AND ANSWERS
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73
Part B
Current tax liabilities (assets) are to be recognised at each reporting date at the amounts that are
expected to be paid to (recovered from) the taxation authorities. The tax rates and tax laws to be
applied are those that have been enacted or substantively enacted by the end of the reporting
period (IAS 12, para. 46).
Deferred tax assets and liabilities are to be measured at the tax rates expected to apply on
realisation or settlement of the deferred tax assets and deferred tax liabilities, respectively.