DEPARTAMENTO DE CONTABILIDAD Y ECONOMÍA FINANCIERA

ESCUELA UNIVERSITARIA DE ESTUDIOS EMPRESARIALES

FINANCIAL ACCOUNTING

(DIPLOMATURA EN CIENCIAS EMPRESARIALES, 2º CURSO, GRUPO 5)

2008-2009

EXERCISES LESSON 5
CORPORATE INCOME TAX

1
 CORPORATE INCOME TAX: LESSON 5

Exercise 1 Lesson 5

Analyse the following temporary differences, indicating the changes in deferred tax assets and
liabilities in each of the year (tax rate = 30%):

a) In year 2008 the company recorded an impairment of accounts receivables of 1,000 €, which
was not considered a deductible expense. According to the tax laws this impairment can be
considered a deductible expense in year 2009.
b) A machinery was bought at the beginning of 2008 for 20,000 € and has a useful life of 4
years. According to the tax laws the company had the possibility of considering the total
amount a deductible expense in 2008, and decided to do so.
c) A computer server was also bought at the beginning of 2008 for 2,000 € and has a useful life
of 2 years. However, according to the tax laws the maximum percentage that is allowed for
the deduction of the depreciation expense is a 25%.
d) The company recorded a provision for responsibilities of 3,000 € in year 2008, which was
not considered a deductible expense. This expense is deductible in 2010. The provision
increased in 160 € in 2009.

SOLUTION:

a)

Year Tax Accounting Difference Effect this year Deferred effect

Exp/Rev Exp/Rev (TE – AE)
2008 0 (1,000) +1,000 Pays more: Right to pay less in the future
Deductible 0.30*1,000 = 300 ∆ Deferred tax asset =300
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2009 (1,000) 0 (1,000) Pays less: Applies the right to pay less in the future
Reversion 0.30*(1,000) ∇ Deferred tax asset = 300
∇ Expense for Æ Expense for deferred tax
Current tax

b)

Year Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
2008 (20,000) (5,000) (15,000) Pays less: Obligation to pay more in the future
Taxable 0.30*(15,000)=4,500 ∆ Deferred tax liability = 4,500
TD ∇ Expense for Æ Expense for Deferred Tax
Current tax
2009 (5,000) + 5,000 Pays more: Complies with the obligation to pay more
Reversion 0.30*5,000=1,500 ∇ Deferred tax liability =1,500
∆ Expense for Æ Revenue for DT
Current tax
2010 (5,000) + 5,000 Pays more: Complies with the obligation to pay more
Reversion 0.30*5,000=1,500 ∇ Deferred tax liability =1,500
∆ Expense for Æ Revenue for DT
Current tax

2
2011 (5,000) + 5,000 Pays more: Complies with the obligation to pay more
Reversion 0.30*5,000=1,500 ∇ Deferred tax liability =1,500
∆ Expense for Æ Revenue for DT
Current tax

c)

Year Tax Accounting Difference Effect this year Deferred effect

Exp/Rev Exp/Rev (TE – AE)
2008 (500) (1,000) +500 Pays more: Right to pay less in the future
Deductible 0.30*500 = 150 ∆ Deferred tax asset =150
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2009 (500) (1,000) +500 Pays more: Right to pay less in the future
Deductible 0.30*500 = 150 ∆ Deferred tax asset =150
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2010 (500) (500) Pays less: Applies the right to pay less in the future
Reversion 0.30*(500) ∇ Deferred tax asset = 150
∇ Expense for Æ Expense for deferred tax
Current tax

2011 (500) (500) Pays less: Applies the right to pay less in the future
Reversion 0.30*(500) ∇ Deferred tax asset = 150
∇ Expense for Æ Expense for deferred tax
Current tax

d)

Year Tax Accounting Difference Effect this year Deferred effect

Exp/Rev Exp/Rev (TE – AE)
2008 (3,000) +3,000 Pays more: Right to pay less in the future
Deductible 0.30*3,000 = 900 ∆ Deferred tax asset =900
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2009 (160) +160 Pays more: Right to pay less in the future
Deductible 0.30*160 = 48 ∆ Deferred tax asset =48
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2010 (3,160) (3,160) Pays less: Applies the right to pay less in the future
Reversion 0.30*(3,160) ∇ Deferred tax asset = 948
∇ Expense for Æ Expense for deferred tax
Current tax

3
Exercise 2 Lesson 5

Company AEAT, Ltd provides the following information for the calculation of the income tax
expense:

• Income before taxes = 930,000 €

• During the year the company has register a provision for environmental actions of 50,000 €
that will be considered deductible in 2015.
• The company owns a machinery bought at the beginning of 2007 for 10,000 €, with a useful
life of 5 years. According to the tax regulations the company considered deductible 100% of
the acquisition price of the machinery.
• The company registered an expense of 4,000 in 2008 that is not deductible.
• Deductions and discounts = 16,000 €
• Withholdings and payments on account = 7,000 €
• Tax rate = 30%

REQUIRED:

• Register the income tax expense of year 2008.

• How much is the total tax expense as shown in the Income Statement?
• Which is the value of the tax assets and liabilities at the end of 2008?

SOLUTION:

Provision for environmental actions:

Year Tax Accounting Difference Effect this year Deferred effect

Exp/Rev Exp/Rev (TE – AE)
2008 0 (50,000) +50,000 Pays more: Right to pay less in the
Deductible 0.30*50,000 future
TD ∆ Current tax ∆ Deferred tax asset Æ
Revenue for deferred tax

2015 (50,000) 0 (50,000) Pays less: Applies the right to pay

Reversion 0.30*(50,000) less in the future
∇ Current tax ∇ Deferred tax asset Æ
Expense for DT

4
Depreciation of the machinery:

Year Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
2007 (10,000) (2,000) (8,000) Pays less: Obligation to pay more in the
Taxable 0.30*(8,000)=2,400 future
TD ∇ Expense for ∆ Deferred tax liability Æ
Current tax Expense for Deferred Tax
2008 (2,000) + 2,000 Pays more: Complies with the obligation
Reversion 0.30*2,000=600 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
2009 (2,000) + 2,000 Pays more: Complies with the obligation
Reversion 0.30*2,000=600 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
2010 (2,000) + 2,000 Pays more: Complies with the obligation
Reversion 0.30*2,000=600 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
2011 (2,000) + 2,000 Pays more: Complies with the obligation
Reversion 0.30*2,000=600 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT

Non-deductible expense:

Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
Penalty 0 -4,000 + 4,000 Higher payment: None
(Positive 0.30*4,000= 1,200
adjustment)

Tax return:

INCOME TAX RETURN 2008

Income before taxes 930,000
+/- Adjustments +50,000
+2,000
+4,000
= Preliminary taxable income 986,000
- Negative taxable income from previous years
= Taxable income 986,000
* Income tax rate 0.30
= Total tax 295,800
- Deductions & discounts -16,000

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= Tax due 279,800
- Withholdings & payments on account -7,000
= INCOME TAX PAYABLE / 272,800
OVERPAYMENT (+/-)

Current tax

279,800 (6300) Current Tax to (473) Tax asset for withholdings 7,000
and payments on account
(4752) Tax liability for the income
tax 272,800
Deferred tax

15,000 (4740) Tax asset for to (6301) Deferred Tax 15,000

deductible temporary
differences
600 (479) Tax liability for to (6301) Deferred Tax 600
taxable temporary
differences

Total income tax expense = - 279,800 + 15,000 + 600 = - 264,200

Value of tax assets and liabilities:

(473) Tax asset for withholdings and payments on account = 7,000 – 7,000 = 0
(4752) Tax liability for the income tax = 272,800 (credit)
(4740) Tax asset for deductible temporary differences = 15,000 (debit)
(479) Tax liability for taxable temporary differences = 2,400 – 600 = 1,800 (credit)

Exercise 3 Lesson 5

Company FEB, Ltd provides the following information for the calculation of the income tax
expense:

Year 2008:
• Losses before taxes = - 60,000 € (the company believes that these losses are an usual event
in the evolution of the business).
• A machinery was bought at the beginning of the year for 80,000 €, with a useful life of 4
years. According to the tax regulations the maximum percentage of deductible depreciation
is 20%.
• The company has also bought plant and equipment for 30,000 €, with a useful life of 4
years. According to the tax regulations the company considered deductible 100% of the
acquisition price.
• Deductions and discounts = 2,000 €
• Withholdings and payments on account = 3,500 €
• Tax rate = 30%

Year 2009:
• Income before taxes = 150,000 €.
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 • Deductions and discounts = 2,000 €
• Withholdings and payments on account = 3,000 €
• The company follows the policy of compensating any negative taxable income from
previous years as soon as it is possible.
• Tax rate = 30%

REQUIRED:

• Register the income tax expense of years 2008 and 2009.

• How much is the total tax expense as shown in the Income Statement of years 2008 and 2009?
• Which is the value of the tax assets and liabilities at the end of 2008 and 2009?

SOLUTION

Depreciation of machinery:

Year Tax Accounting Difference Effect this year Deferred effect

Exp/Rev Exp/Rev (TE – AE)
2008 (16,000) (20,000) +4,000 Pays more: Right to pay less in the future
Deductible 0.30*4,000 = 1,200 ∆ Deferred tax asset =1,200
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2009 (16,000) (20,000) +4,000 Pays more: Right to pay less in the future
Deductible 0.30*4,000 = 1,200 ∆ Deferred tax asset =1,200
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2010 (16,000) (20,000) +4,000 Pays more: Right to pay less in the future
Deductible 0.30*4,000 = 1,200 ∆ Deferred tax asset =1,200
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2011 (16,000) (20,000) +4,000 Pays more: Right to pay less in the future
Deductible 0.30*4,000 = 1,200 ∆ Deferred tax asset =1,200
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2012 (16,000) 0 + 16,000 Pays less: Applies the right to pay less
Reversion 0.30*16,000 = 4,800 ∇ Deferred tax asset =4,800
∇ Expense for Æ Expense for deferred tax
Current tax

Depreciation of plant and equipment:

Year Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
2008 (30,000) (7,500) (22,500) Pays less: Obligation to pay more in the
Taxable 0.30*(22,500)=(6,750) future
TD ∇ Expense for ∆ Deferred tax liability Æ
Current tax Expense for Deferred Tax

7
2009 (7,500) + 7,500 Pays more: Complies with the obligation
Reversion 0.30*7,500=2,250 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
2010 (7,500) + 7,500 Pays more: Complies with the obligation
Reversion 0.30*7,500=2,250 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
2011 (7,500) + 7,500 Pays more: Complies with the obligation
Reversion 0.30*7,500=2,250 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT

INCOME TAX RETURN 2008 2009

Income before taxes - 60,000 + 150,000
+/- Adjustments +4,000 +4,000
- 22,500 +7,500
= Preliminary taxable income - 78,500 161,500
- Negative taxable income from previous years - 78,500
= Taxable income 83,000
* Income tax rate 0.3
= Total tax 24,900
- Deductions & discounts - 2,000
= Tax due 22,900
- Withholdings & payments on account -3,500 -3,000
= INCOME TAX PAYABLE / -3,500 19,900
OVERPAYMENT (+/-)

Current tax 2008

3,500 (4709) Tax asset for tax to (473) Tax asset for withholdings 3,500
overpayment and payments on account

Deferred tax 2008

1,200 (4740) Tax asset for to (6301) Deferred Tax 1,200

deductible temporary
differences
6,750 (6301) Deferred Tax to (479) Tax liability for taxable 6,750
temporary differences

23,550 (4745) Tax asset for the (6301) Deferred Tax 23,550
compensation of losses

8
Total income tax expense 2008 = +1,200 – 6,750 + 23,550 = +18,000

Value of tax assets and liabilities 2008:

(473) Tax asset for withholdings and payments on account = 3,500 – 3500 = 0
(4709) Tax asset for tax overpayment = 3,500 (debit)
(4740) Tax asset for deductible temporary differences = 1,200 (debit)
(479) Tax liability for taxable temporary differences = 6,750 (credit)
(4745) Tax asset for the compensation of losses = 23,550 (debit)

Current tax 2009

22,900 (6300) Current Tax to (473) Tax asset for withholdings 3,000
and payments on account
(4752) Tax liability for the income 19,900
tax
Deferred tax 2009

1,200 (4740) Tax asset for to (6301) Deferred Tax 1,200

deductible temporary
differences
2,250 (479) Tax liability for to (6301) Deferred Tax 2,250
taxable temporary
differences

23,550 (6301) Deferred Tax (4745) Tax asset for the 23,550
compensation of losses

Total income tax expense 2009 = - 22,900 + 1,200 + 2,250 - 23,550 = - 43,000

Value of tax assets and liabilities 2009:

(473) Tax asset for withholdings and payments on account = 3,000 – 3,000 = 0
(4752) Tax liability for the income tax = 19,900 (credit)
(4740) Tax asset for deductible temporary differences = 1,200 + 1,200 = 2,400 (debit)
(479) Tax liability for taxable temporary differences = 6,750 – 2,250 = 4,500 (credit)
(4745) Tax asset for the compensation of losses = 23,550 – 23,550 = 0

9
Exercise 4 Lesson 5

Company Oscar & Brothers, Ltd provides the following information for the calculation of the
income tax expense:

Year 2008:
• Losses before taxes = - 17,500 €
• The company has made a donation of 3,000 € to a not-for-profit organization, which is not
deductible.
• The balance sheet at the end of 2007 included the asset account “Tax asset for deductible
temporary differences” with a debit balance of 1,500 €. It is know that the temporary
difference it derives from reverses (the total amount) this year.
• A non-current asset was bought at the beginning of the year for 150,000 €, with a useful life
of 20 years. According to the tax regulations the maximum percentage of deductible
depreciation is 20%.
• The company expects that it is going to obtain profits in the following years.
• Deductions and discounts = 1,800 €
• Withholdings and payments on account = 3,000 €
• Tax rate = 30%

Year 2009:
• Income before taxes = 60.000 €
• The company has decided to compensate, if possible, 50% of the negative taxable income
obtained in the previous year.
• Deductions and discounts = 800 €
• Withholdings and payments on account = 2,100 €
• Tax rate = 30%

REQUIRED:

• Register the income tax expense of years 2008 and 2009.

• How much is the total tax expense as shown in the Income Statement of years 2008 and 2009?
• Which is the value of the tax assets and liabilities at the end of 2008 and 2009?

SOLUTION

Donation:

Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
2008 0 -3,000 + 3,000 Higher payment: None
(Positive 0.30*3,000= 900
adjustment)

Tax asset for deductible temporary differences:

Tax asset for DT differences = Temporary diference * 0.3 Æ

Temporary difference = Tax asset / 0.3 = 1,500 / 0.3 = 5,000

10
Year Tax Accounting Difference Effect this year Deferred effect
Exp/Rev Exp/Rev (TE – AE)
2007 0 (5,000) +5,000 Pays more: Right to pay less in the future
Deductible 0.30*5,000 = 1,500 ∆ Deferred tax asset =1,500
TD ∆ Expense for Æ Revenue for deferred tax
Current tax

2008 (5,000) 0 (5,000) Pays less: Applies the right to pay less in the future
Reversion 0.30*(5,000) ∇ Deferred tax asset = 1,500
∇ Expense for Æ Expense for deferred tax
Current tax

Depreciation:
Accounting depreciation: 150,000 / 20 = 7,500 per year
Tax depreciation: 150,000 x 20% = 30,000 u.m./año

Year Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
2008 (30,000) (7,500) (22,500) Pays less: Obligation to pay more in the
Taxable 0.30*(22,500)=(6,750) future
TD ∇ Expense for ∆ Deferred tax liability Æ
Current tax Expense for Deferred Tax
2009 (30,000) (7,500) (22,500) Pays less: Obligation to pay more in the
Taxable 0.30*(22,500)=(6,750) future
TD ∇ Expense for ∆ Deferred tax liability Æ
Current tax Expense for Deferred Tax
… … … … …

INCOME TAX RETURN 2008 2009

Income before taxes -17,500 60,000
+/- Adjustments +3,000 -22,500
-5,000
-22,500
= Preliminary taxable income -42,000 37,500
- Negative taxable income from previous years -21,000
= Taxable income 16,500
* Income tax rate 0.3
= Total tax 4,950
- Deductions & discounts -800
= Tax due 4,150
- Withholdings & payments on account -3,000 -2,100
= INCOME TAX PAYABLE / -3,000 2,050
OVERPAYMENT (+/-)

11
Current tax 2008

3,000 (4709) Tax asset for tax to (473) Tax asset for withholdings 3,000
overpayment and payments on account

Deferred tax 2008

1,500 (6301) Deferred Tax to (4740) Tax asset for deductible 1,500
temporary differences

6,750 (6301) Deferred Tax to (479) Tax liability for taxable 6,750
temporary differences

12,600 (4745) Tax asset for the (6301) Deferred Tax 12,600
compensation of losses

Total income tax expense 2008 = -1,500 – 6,750 + 12,600 = + 4,350

Value of tax assets and liabilities 2008:

(473) Tax asset for withholdings and payments on account = 3,000 – 3000 = 0
(4709) Tax asset for tax overpayment = 3,000 (debit)
(4740) Tax asset for deductible temporary differences = 1,500 – 1,500 = 0
(479) Tax liability for taxable temporary differences = 6,750 (credit)
(4745) Tax asset for the compensation of losses = 12,600 (debit)

Current tax 2009

4,150 (6300) Current Tax to (473) Tax asset for withholdings 2,100
and payments on account
(4752) Tax liability for the income 2,050
tax
Deferred tax 2009

6,750 (6301) Deferred Tax to (479) Tax liability for taxable 6,750
temporary differences

6,300 (6301) Deferred Tax (4745) Tax asset for the 6,300
compensation of losses

Total income tax expense 2009 = - 4,150 – 6,750 – 6,300 = - 17,200

Value of tax assets and liabilities 2009:

(473) Tax asset for withholdings and payments on account = 2,100– 2,100 = 0

12
(4752) Tax liability for the income tax = 2,050 (credit)
(479) Tax liability for taxable temporary differences = 6,750 + 6,750 = 13,500 (credit)
(4745) Tax asset for the compensation of losses = 12,600 – 6,300 = 6,300 (debit)

Exercise 5 Lesson 5

Company FP, Ltd. has received at the beginning of 2008 a grant of 2,500,000 € from the regional
government for the acquisition of new premises with a cost of 5,000,000 € (Constructions; 2,500,000 €;
Land: 2,500,000 €). The useful life of the premises is 40 years (linear). The premises are bought the 4th of
January and the subvention is collected in cash the 1st of February.

REQUIRED: Register the operations related to the grant in 2008 and 2009 (tax rate: 30%)

SOLUTION
Year 2008:

- 02/01/01: Recognition of the grant as revenue directly in equity.

Nº Accounts Debit Credit
4708 Receivable from public authorities (capital grants) 2.500.000
940 Revenues of official capital grants 2.500.000

Nº Accounts Debit Credit

8301 Deferred tax 750.000
479 Tax liability for taxable temporary differences 750.000

- 04/01/01: Acquisition of the premises

Nº Accounts Debit Credit
210 Land 2.500.000
211 Constructions 2.500.000
572 Cash 5.000.000

- 01/02/01: Collection of the grant

Nº Accounts Debit Credit
572 Cash 2.500.000
4708 Receivable from public authorities (capital grants) 2.500.000

31st of December: Treatment of operations related to the grant.

- Depreciation of the premises Î 2.500.000/40=62.500
Nº Accounts Debit Credit
681 Tangible fixed assets depreciation expense 62.500
281 Tangible fixed assets accumulated depreciation 62.500

- For the transfer of the grant to income for the year (the grant is only financing 50% of the
construction and 50% of the land)
Nº Accounts Debit Credit
840 Transfers of official capital grants 31.250
Capital grants, donations and legacies transferred to
746 31.250
income for the year

Nº Accounts Debit Credit

479 Tax liability for taxable temporary differences 9.375
13
8301 Deferred tax 9.375

At the end of each of the years, accounts of group 8 and 9 are closed:
Nº Accounts Debit Credit
940 Revenues of official capital grants 2.500.000
8301 Deferred tax 750.000
130 Official capital grants 1.750.000

Nº Accounts Debit Credit

8301 Deferred tax 9.375
130 Official capital grants 21.875
840 Transfers of official capital grants 31.250

Year 2009:

31st of December: Treatment of operations related to the grant.

- Depreciation of the premises Î 2.500.000/40=62.500

Nº Accounts Debit Credit
681 Tangible fixed assets depreciation expense 62.500
281 Tangible fixed assets accumulated depreciation 62.500

- For the transfer of the grant to income for the year (the grant is only financing 50% of the
construction and 50% of the land)
Nº Accounts Debit Credit
840 Transfers of official capital grants 31.250
Capital grants, donations and legacies transferred to
746 31.250
income for the year

Nº Accounts Debit Credit

479 Tax liability for taxable temporary differences 9.375
8301 Deferred tax 9.375

Nº Accounts Debit Credit

8301 Deferred tax 9.375
130 Official capital grants 21.875
840 Transfers of official capital grants 31.250

Exercise 6 Lesson 5

Company FP, Ltd has performed the following transactions with financial instruments:

Year 200X-1:

ƒ 30th of January: Acquisition of 1,000 shares of FCC at a price of 60.5 € per share. The shares are paid in
cash.
ƒ 31st of December: The market price of the FCC’s shares is 65 €.

Year 200X:

ƒ 30th of June: The shares of FCC are sold in cash at a price of 68 €.

14
REQUIRED: Register the operations, considering that the shares are classified by the company in
the portfolio of “available for sale” financial assets (tax rate 30%).

SOLUTION

Year 200X-1:

30th of January: Acquisition of 1,000 shares of FCC at a price of 60.5 € per share. The shares
are paid in cash and classified by the company in the portfolio of “available for sale” financial
assets.

Nº Accounts Debit Credit

250 Long term holdings in equity instruments 60.500
572 Cash 60.500

31st of December: The market price of the FCC’s shares is 65 €.

Nº Accounts Debit Credit

250 Long term holdings in equity instruments 4.500
900 Profits from available for sale financial assets 4.500

Nº Accounts Debit Credit

8301 Deferred tax 1.350
479 Tax liability for taxable temporary differences 1.350

At the end of each of the years, accounts of group 8 and 9 are closed:

Nº Accounts Debit Credit

900 Profits from available for sale financial assets 4.500
8301 Deferred tax 1.350
1330 Adjustments for changes in value of financial instruments 3.150
available for sale

Year 200X:

30th of June: The shares of FCC are sold in cash at a price of 68 €.

Nº Accounts Debit Credit

250 Long term holdings in equity instruments 3.000
900 Profits from available for sale financial assets 3.000

Nº Accounts Debit Credit

8301 Deferred tax 900
479 Tax liability for taxable temporary differences 900

Nº Accounts Debit Credit

572 Cash 68.000
250 Long term holdings in equity instruments 68.000

15
Nº Accounts Debit Credit
802 Transfer of profits from available for sale financial assets 7.500
7632 Profits from available for sale portfolio 7.500

Nº Accounts Debit Credit

479 Tax liability for taxable temporary differences 2.250
8301 Deferred tax 2.250

At the end of each of the years, accounts of group 8 and 9 are closed:

Nº Accounts Debit Credit

900 Profits from available for sale financial assets 3.000
8301 Deferred tax 900
1330 Adjustments for changes in value of financial instruments 2.100
available for sale

Nº Accounts Debit Credit

8301 Deferred tax 2.250
1330 Adjustments for changes in value of financial instruments 5.250
available for sale
802 Transfer of profits from available for sale financial assets 7.500

Exercise 7 Lesson 5

Company FP, Ltd has performed the following transactions with financial instruments:

Year 200X-1:

ƒ 30th of January: Acquisition of 1,000 shares of FCC at a price of 60.5 € per share. The shares are paid in
cash.
ƒ 31st of December: The market price of the FCC’s shares is 55.5 €.

Year 200X:

ƒ 30th of June: The shares of FCC are sold in cash at a price of 55.5 €.

REQUIRED: Register the operations, considering that the shares are classified by the company in
the portfolio of “available for sale” financial assets (tax rate 30%).

SOLUTION

Year 200X-1:

30th of January: Acquisition of 1,000 shares of FCC at a price of 60.5 € per share. The shares
are paid in cash and classified by the company in the portfolio of “available for sale” financial
assets.

Nº Accounts Debit Credit

250 Long term holdings in equity instruments 60,500
572 Cash 60,500

31st of December: The market price of the FCC’s shares is 55.5 €.

16
Nº Accounts Debit Credit
800 Losses from available for sale financial assets 5,000
250 Long term holdings in equity instruments 5,000

Nº Accounts Debit Credit

4740 Tax asset for deductible temporary differences 1,500
8301 Deferred tax 1,500

Nº Accounts Debit Credit

8301 Deferred tax 1,500
1330 Adjustments for changes in value of financial instruments 3,500
available for sale
800 Losses from available for sale financial assets 5,000

Year 200X:

30th of June: The shares of FCC are sold in cash at a price of 55.5 €.

Nº Accounts Debit Credit

572 Cash 55,500
250 Long term holdings in equity instruments 55,500

Nº Accounts Debit Credit

6632 Losses from available for sale portfolio 5,000
902 Transfer of losses from available for sale financial assets 5,000

Nº Accounts Debit Credit

8301 Deferred tax 1,500
4740 Tax asset for deductible temporary differences 1,500

Nº Accounts Debit Credit

902 Transfer of losses from available for sale financial assets 5,000
8301 Deferred tax 1,500
1330 Adjustments for changes in value of financial instruments 3,500
available for sale

Exercise 8 Lesson 5

Company March, Ltd provides the following information for the calculation of the income tax
expense:

Year 2008:
• Income before taxes = 34,800 €
• A non-current asset was bought at the beginning of 2007 for 1,000 €, with a useful life of 5
years. According to the tax regulations the maximum percentage of deductible depreciation
was 100%, and the company decided to consider deductible expense in 2007 the total
acquisition price.

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 • A negative taxable income of 40,000 € was obtained in 2007. Since the company was
expecting to recover and earn profits in the following years, the corresponding tax asset was
registered. In 2008, 50% of the negative taxable income has been compensated in the
calculation of tax payment.
• Withholdings and payments on account = 500 €
• Tax rate = 30%

Year 2009:
• Income before taxes = 45,000 €
• The company has registered a revenue of 5,000 €, which is not computable.
• The company has decided to compensate the maximum negative taxable income obtained in
previous years.
• Deductions and discounts = 7,000 €
• Withholdings and payments on account = 800 €
• Tax rate = 30%

REQUIRED:

• Register the income tax expense of years 2008 and 2009.

• How much is the total tax expense as shown in the Income Statement of years 2008 and 2009?
• Which is the value of the tax assets and liabilities at the end of 2008 and 2009?

Depreciation:

Year Tax Accounting Difference Effect this year Deferred effect

Expense Expense (TE – AE)
2007 (1,000) (200) (800) Pays less: Obligation to pay more in the
Taxable 0.30*(800)=(240) future
TD ∇ Expense for ∆ Deferred tax liability Æ
Current tax Expense for Deferred Tax
2008 (200) + 200 Pays more: Complies with the obligation
Reversion 0.30*200=60 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
2009 (200) + 200 Pays more: Complies with the obligation
Reversion 0.30*200=60 to pay more
∆ Expense for ∇ Deferred tax liability Æ
Current tax Revenue for DT
… … … … …

Negative taxable income:

Negative taxable income 2007 = 40,000

Tax asset for the compensation of losses = 0.3 * 40,000 = 12,000
Amount to compensate in 2008 = 40,000 / 2 = 20,000
Decrease in the tax assets = 12,000 / 2 = 6,000 = 20,000 * 0.3
Amount to compensate in 2009 = to be determined

Non-computable revenue:

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 Tax Accounting Difference Effect this year Deferred effect
Revenue Revenue (TE – AE)
2009 0 + 5,000 (5,000) Lower payment: None
(Negative 0.30*5,000=
adjustment) (1,500)

INCOME TAX RETURN 2008 2009

Income before taxes 34,800 45,000
+/- Adjustments + 200 + 200
- 5,000
= Preliminary taxable income 35,000 40,200
- Negative taxable income from previous years - 20,000 - 20,000
= Taxable income 15,000 20,200
* Income tax rate 0.3 0.3
= Total tax 4,500 6,060
- Deductions & discounts
= Tax due 4,500 6,060
- Withholdings & payments on account - 500 - 800
= INCOME TAX PAYABLE 4,000 5,260

Current tax 2008

4,500 (6300) Current Tax to (473) Tax asset for withholdings 500
and payments on account
(4752) Tax liability for the income 4,000
tax
Deferred tax 2008

60 (479) Tax liability for to (6301) Deferred Tax 60

taxable temporary
differences

6,000 (6301) Deferred Tax (4745) Tax asset for the 6,000
compensation of losses

Total income tax expense 2008= -4,500 + 60 – 6,000 = - 10,440

Value of tax assets and liabilities 2008:

(473) Tax asset for withholdings and payments on account = 500 –500 = 0
(4752) Tax liability for the income tax = 4,000 (credit)
(479) Tax liability for taxable temporary differences = 240 – 60 = 180 (credit)
(4745) Tax asset for the compensation of losses = 12,000 – 6,000 = 6,000 (debit)

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Current tax 2009

6,060 (6300) Current Tax to (473) Tax asset for withholdings 800
and payments on account
(4752) Tax liability for the income 5,260
tax
Deferred tax 2009

60 (479) Tax liability for to (6301) Deferred Tax 60

taxable temporary
differences

6,000 (6301) Deferred Tax (4745) Tax asset for the 6,000
compensation of losses

Total income tax expense 2009 = - 6,060 + 60 – 6,000 = - 12,000

Value of tax assets and liabilities 2009:

(473) Tax asset for withholdings and payments on account = 800 –800 = 0
(4752) Tax liability for the income tax = 5,260 (credit)
(479) Tax liability for taxable temporary differences = 240 – 60 - 60 = 120 (credit)
(4745) Tax asset for the compensation of losses = 12,000 – 6,000 – 6,000 = 0

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