Interest expense is accrued for accounting purposes

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Interest expense is accrued for accounting purposes resulting in Interest Payable however, for tax purposes only interest paid is deductible. Development costs may be recognised as an asset for accounting purposes and then expensed as the benefits are consumed. In contrast, development costs are allowed as a deduction for tax purposes when paid. Rent received in advance is regarded as the liability Unearned Revenue for accounting purposes and then recorded as income (revenue) over time as the service is provided. The common tax treatment is to record the amount received in advance as taxable income immediately. 3. In contrast to accounting profit, taxable profit is based on rules that create economic incentives and disincentives. Explain this comment by reference to the following items: depreciation of non-current assets, exempt income, fines and penalties, and entertainment costs. Depreciation expense recognised in accordance with AASB 116 Property, plant and equipment allocates the depreciable amount of the asset on a systematic basis over the asset’s useful life. The tax treatment is based on a set of rates provided by the tax office. Tax depreciation is usually accelerated when compared to accounting depreciation because the government wants to encourage capital expenditures in the economy. Exempt income may be recognised as revenue in accounting profit but does not enter the calculation of taxable profit. A good example is a government grant to a company for hiring apprentices. The government wants to encourage employers to give jobs to young people so they do not give money to a company and then take it away as a tax. The grant for apprentices is exempt from tax.
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Fines and penalties are recognised as expenses in accounting profit but do not enter the calculation of taxable profit. The government does not want to encourage pollution, anti- competitive behaviour or traffic violations by giving those responsible a tax break for it. Entertainment costs are recognised as expenses in accounting profit, but for tax purposes may not be allowed as deductions. The idea here is not to encourage hard drinking in the workplace by providing tax deductions for it. 4. In contrast to accounting profit, taxable profit does not include the effects of valuation adjustments. Explain this comment by reference to the following items: goodwill, revalued property or plant and inventory. Purchased goodwill is recognised as an asset for accounting purposes. Purchased goodwill is expensed based on annual impairment testing. An impairment loss is, in effect, a valuation adjustment that reflects a diminishment in recoverability of the asset. For tax purposes, write- downs of goodwill are not allowed as a deduction. Revalued land that is sold will give rise to a gain or loss for accounting purposes that is calculated using the revalued amount of the land, that is, the carrying amount of the land at fair value. In contrast, the gain or loss included in taxable profit is based on the land’s original cost.
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