Revalued plantis depreciated for accounting purposes based on revalued amount of plant ratherthan its original cost. In contrast, tax depreciation is based on the original cost of plant.Inventoryis valued at the lower of cost and net realisable value for accounting purposes. Thevaluation adjustment that arises from the use of net realisable value is recognised as an expensein accounting profit. For tax purposes, inventory is only deductible when sold based on itsoriginal cost.5.Describe how to prepare a current tax worksheet to determine the current tax for theperiod. What items are typically added back to accounting profit and what items arededucted?The current tax worksheet uses an indirect approach to determine taxable profit. It begins withaccounting profit, that is, profit before tax. Adjustments are then made to:remove items included in profit before tax that do not enter into the calculation of taxableprofitadd in other items that do enter into the calculation of taxable profitFigure 6.8 in the textbook shows how the adjustments are made.(Revenues or gains that are not equal to assessable incomes in the period- subtractInterest revenue
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Dividend revenueGain on sale of plant for accounting purposesUnearned revenue at the beginning of the year.Expenses or losses that are not equal to deductions in the period - addbackNon-deductible expenses, for example, entertainmentImpairment loss on goodwill or other assetsWarranty expenseBad and doubtful debts expense,Depreciation expenseDevelopment expense.Assessable incomes that are not equal to revenues or gains in the period -add inInterest receivedDividends receivedGain on sale of plant for tax purposesUnearned revenue at the end of the year.Deductions that are not equal to expenses or losses in the period -subtractLong service leave paidWarranty paidBad debts written offTax depreciationDevelopment costs paid.6.Explain why the current tax liability at the end of the reporting period may not equalthe income tax expense for the period.The current tax liability represents the amount of tax expected to be paid to the Australian TaxOffice by the company on assessment for the current year using the current tax rates and tax law.Current tax liability = tax on taxable income less any instalments of tax paid for the yearTax on taxable income = taxable income x corporate tax rateIn contrast, income tax expense relates to income tax that is expected to be paid or refunded inthe future because of current tax and deferred tax. Income tax expense includes a component forthe current tax liability but also includes a component for any deferred tax liabilities and assets.As shown in the textbook, the current tax included in profit or loss for the year is recognised asfollows:
30.6.17Income Tax ExpenseCurrent Tax Liability(Step 1: The journal entries to recognise the current tax forthe year based on taxable income)DrCr78 00078 000
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