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FR M4 – Module Quiz 1 ( Parts A and B)

YOU SCORED 8 OUT OF A POSSIBLE 10 [80%]

Question 1 Marks: 1
Entity A has an accounting profit of $300,000 and a taxable profit of $350,000.

During the year, a plant with a cost of $100,000 was depreciated at a rate of 20% for accounting
purposes and at a rate of 25% for tax purposes.

The entity also expensed a parking fine of $2,000.

The tax rate is 30%

What is the amount of tax expense that will be reflected in the Statement of Comprehensive income
for the year?

Answer Options
You answered D. The correct answer is D

USER SELECTION CORRECT ANSWER

A $89,100

B $104,100

C $105,000

D $106,500

Answer Explanation
D is correct and the first thing to be careful of here is that there is a lot of information that is not be
relevant.

(Simple answer - this is a trick question to make sure you carefully read every question in your final
CPA exam)

Normally you take accounting profit and adjust it to get taxable profit.

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But you do not need to do this in this question. If you try and do this in this question you will get the
wrong answer. You do not need to message us about this - it is deliberately focused on helping you
read the question very carefully, not just jump into doing calculations.

The question here gives you Taxable Profit as $350,000.

So, step 1 is to work out current tax:

Current tax = taxable profit x tax rate

350,000 x 30% = 105,000

and the calculations to support tax expense are as follows:

Tax expense = current tax + deferred tax expense - deferred tax income

Deferred tax

CA TB TD DT

(20,000) (25,000) 5,000 1,500

Tax expense = 105,000 + 1,500

= 106,500
Module: 4 > Part: A > 4.2 Current tax > Calculating current tax > Page:
163

Question 2 Marks: 0
Consider the following differences between the carrying amount and tax bases.

What is the net deferred tax income or expense for the year?

Account Carrying amount (CA) Tax base (TB)

Property, plant & equipment $550,000 $600,000

$2,000,000 $0
Intangible asset*

Unearned revenue $900,000 $0

$57,000 $0
Provisions

*Note that the intangible asset is not goodwill.

Answer Options
You answered A. The correct answer is B
USER SELECTION CORRECT ANSWER

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A Deferred tax expense of $362,100

B Deferred tax expense of $297,900

C Deferred tax income of $837,900

D Deferred tax income of $327,900

Answer Explanation
B is correct as outlined in the table below:

Account Carrying Tax base Temporary Deferred DTA/DTL

amount (TB) difference tax
(CA) (TD)
Property, plant & $550,000 $600,000 ($50,000) $15,000 DTA
equipment
Intangible asset $2,000,000 $0 $2,000,000 $600,000 DTL
Unearned revenue $900,000 $0 $900,000 $270,000 DTA
Provisions $57,000 $0 $57,000 $17,100 DTA
$297,900 Deferred
tax
expense

Module: 4 > Part: A > 4.3 Deferred tax > Step 1: Determining the tax
base of assets and liabilities > Page: 165

Question 3 Marks: 1
Which of the following is the correct calculation of tax expense?

Answer Options
You answered A. The correct answer is A

USER SELECTION CORRECT ANSWER

A Current tax + deferred tax

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B Current tax + capital gains tax

C Deferred tax asset - deferred tax liability

D Current tax payable - deferred tax expense

Answer Explanation
A is correct based on Para. 5 of IAS 12: Tax expense is calculated as the sum of current tax expense
and deferred tax expense.

Module: 4 > Part: A > 4.1 Tax expense > Page: 162

Question 4 Marks: 1
Entity A has the following income statement for Year 1:

Sales $200,000

Less: expenses ($122,000)

Cost of sales $95,000

Fines $2,000

Depreciation $5,000

Other expenses $20,000

Profit before tax $78,000

Notes:

1. The fines relate to speeding tickets and parking violations.

2. The applicable tax rate is 30%

What is the current tax expense in Year 1 if the depreciation for tax purposes is $4,000?

Answer Options
You answered D. The correct answer is D

USER SELECTION CORRECT ANSWER

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A $22,200

B $22,800

C $23,400

D $24,300

Answer Explanation
D is correct because the tax should have been calculated as follows:

$78,000 Profit before tax

+ $2,000 Fines (this is non-deductible and is thus added back for the purposes of calculating tax
expense)

+ $5,000 Accounting depreciation

- ($4,000) Tax depreciation

= $81,000 Taxable Profit

Current tax expense = taxable profit x 30%

Current tax expense = $81,000 x 30% = $24,300

A is incorrect because the calculation subtracted the tax depreciation from accounting profit before
tax to arrive at taxable profit. The calculation did not add back fines and accounting depreciation.

B is incorrect because the calculation subtracted the tax depreciation and added back fines to
accounting profit before tax to arrive at taxable profit. The calculation did not add back accounting
depreciation.

C is incorrect because this calculation took accounting profit before tax to equal taxable profit and
multiplied this by the tax rate. It did not add back fines and accounting depreciation and subtract tax
depreciation.

Module: 4 > Part: A > 4.2 Current tax > Calculating current tax > Page:
163

Question 5 Marks: 1
The balance sheet of Entity C included income received in advance with a balance of $30,000.

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The amount comprised interest income of $20,000 and rentals from a tenant of $10,000.

The tax on interest income is calculated on the cash basis while tax on rentals is calculated on the
accrual basis (i.e. when the revenue is earned).

What is the tax base for the income received in advance account?

Answer Options
You answered B. The correct answer is B

USER SELECTION CORRECT ANSWER

A $0

B $10,000

C $20,000

D $30,000

Answer Explanation
B is correct because interest is taxed on the cash basis and so would have already been included in
tax expense in the current year. Therefore, the entire amount of interest revenue will not be taxed in
the future as it is taxed in the current year.

Revenue from rentals will be taxed when the rent income is earned and so, the full amount of $10,000
will be subject to tax in the future.

Tax base for Income received in advance = carrying amount - amounts of revenue that will not be
taxed in the future.

Tax base = $30,000 - ($20,000 for interest + $0 for rental)= $10,000.

Module: 4 > Part: A > 4.3 Deferred tax > Step 1: Determining the tax
base of assets and liabilities > Page: 168

Question 6 Marks: 1
Entity Z has a tax loss of $6,000 in year 1 and a taxable profit of $10,000 in year 2.

In year 1, management was unable to prove that there would be future taxable profits against which
the tax losses could be recouped. However, there was a taxable temporary difference of $1,000.

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The tax rate is 30 per cent.

Which of the following correctly represents the journal entry for the tax loss in year 1?

Answer Options
You answered A. The correct answer is A
USER SELECTION CORRECT ANSWER

A Dr Deferred tax asset 300 Cr Current tax income 300

B Dr Deferred tax asset 1,000 Cr Deferred tax income 1,000

C Dr Deferred tax liability 1,800 Cr Deferred tax income 1,800

D Dr Deferred tax liability 6,000 Cr Current tax expense 6,000

Answer Explanation
A is correct because in terms of the probability criterion, deferred tax asset can only be recognised if
it is probable that there would be future taxable amounts against which the asset can be recouped.

In year 1, it was not probable that there would be future taxable amounts. Thus, the deferred tax
arising from the tax loss can only be recognised to the extent that there is a deferred tax liability.

A taxable temporary difference of $1,000 exists. This means there is a DTL of $300 ($1,000 x 30%)

Tax loss gives rise to a DTA of $1,800 ($6,000 x 30%).

However, only $300 of this is probable at the end of year 1 and so, only $300 of DTA is recognised.

Module: 4 > Part: B > 4.6 Recovery of tax losses > Page: 188

Question 7 Marks: 1
Entity Z has a tax loss of $6,000 in year 1 and a taxable profit of $10,000 in year 2.

In year 1, management was unable to prove that there would be future taxable profits against which
the tax losses could be recouped. However, there was a taxable temporary difference of $1,000.

The tax rate is 30 per cent.

Which of the following correctly represents the journal for the recoupment of unrecognised tax losses
in year 2?

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Answer Options
You answered B. The correct answer is B
USER SELECTION CORRECT ANSWER

A Dr Current tax expense 900 Cr Deferred tax liability 900

B Dr Deferred tax expense 1,500 Cr Current tax income 1,500

C Dr Current tax expense 3,000 Cr Current tax payable 3,000

D Dr Deferred tax asset 6,000 Cr Deferred tax income 6,000

Answer Explanation
B is correct as there was a tax loss of $6,000 in year 1 which gave rise to $1,800 in tax credits.
However, only $300 was probable in year 1 and so only $300 was recognised as an asset.

Thus, $1,500 ($1,800 - $300) of unused tax credits were brought forward to year 2.

Since there was a taxable profit in the year 2, the unused tax credits could then be recognised as an
asset and recouped against the profit.

The journal entries to raise the DTA would be:

Dr DTA 1,500

Cr Current tax income 1,500

The journal entry to recoup the tax credit would be:

Dr Deferred tax expense 1,500

Cr DTA 1,500

B shows the combined journal of this treatment.

Module: 4 > Part: B > 4.6 Recovery of tax losses > Page: 188

Question 8 Marks: 1
Assuming no other transaction and no history of losses, under which of the following circumstances
should an organisation recognise a deferred tax asset?

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Answer Options
You answered A. The correct answer is A

USER SELECTION CORRECT ANSWER

The expected reversals of the deductible temporary differences are less

A than the expected reversals of the taxable temporary differences during the
applicable periods.

The expected reversals of the deductible temporary differences are greater

B than the expected reversals of the taxable temporary differences during the
applicable periods.

C There are no expected reversals of the taxable temporary differences.

D There are no expected reversals of the deductible temporary differences.

Answer Explanation
A is correct because expected taxable profits arising from the reversal of the taxable temporary
difference should be enough to absorb the amounts of the deductible temporary difference.

B is incorrect because expected taxable profits arising from the reversal of the taxable temporary
difference should be enough to absorb the amounts of the deductible temporary difference.

C is incorrect because temporary differences will not reverse.

D is incorrect because it is incorrect to assume that temporary differences will not reverse.

Module: 4 > Part: B > 4.5 Recognition of deferred tax assets > Initial
recognition of other assets or liabilities not in a business combination
transaction (IAS 12, para. 15(b)) > Page: 181

Question 9 Marks: 1
The following items appeared in the records of Changerate Ltd as at 30 June 20Y3.

Statement of financial position Carrying

item amount Notes
Rental revenue received in $40,000 Taxable when received in cash
advance

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Employee benefits liability $10,000 Deductible for tax on a cash basis

Interest revenue receivable $25,000 Taxable on receipt in cash
Development costs carried $20,000 Claimed as an allowable deduction in a
forward previous period
Plant and equipment less $50,000 Tax written-down amount of $20,000
accumulated depreciation

Additional information

• Unused tax losses were $60,000.

• The recognition criteria for deferred tax assets and deferred tax liabilities were satisfied.

• On 31 May 20Y3, It was announced that the income tax rate will be increased from 30 per cent to
35 per cent immediately after year end. Changerate had prepared correctly completed financial
statements at year end prior to hearing of this news.

Which of the following choices correctly records the tax consequences of these events?

I 30 June 20Y3
Deferred tax expense $1,750
Deferred tax asset $3,750
Deferred tax liability $5,500
II 30 June 20Y3
Deferred tax expense $1,250
Deferred tax asset $2,500
Deferred tax liability $3,750
III 30 June 20Y3
Deferred tax expense $2,250
Deferred tax asset $3,500
Deferred tax liability $5,750
IV 30 June 20Y3
Deferred tax asset $5,500
Deferred tax liability $3,750
Deferred tax income $1,750

Answer Options
You answered D. The correct answer is D

USER SELECTION CORRECT ANSWER

A I

B II

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C III

D IV

Answer Explanation
The correct answer is Option D based on the following table of calculations.

Taxable Deductible
Carrying temporary temporary
Statement of financial position item amount Tax base differences differences
$ $ $ $
(1) (2) (3) (4)
1 Rental revenue received in advance $40,000 $0 $40,000
2 Employee benefits liability $10,000 $0 $10,000
3 Interest revenue receivable $25,000 $0 $25,000
4 Development costs carried forward $20,000 $0 $20,000
Plant and equipment less accumulated
5 $50,000 $20,000 $30,000
depreciation
6 Temporary differences $75,000 $50,000
7 Unused tax losses $60,000
8 $110,000
Deferred tax liability before change in
9 $22,500
ax rate (row 6, col. 3 x 0.30)
Deferred tax asset before change in tax
10 $33,000
rate (row 8, col. 4 x 0.30)
Deferred tax liability after change in tax
11 $26,250
rate (row 6, col. 3 x 0.35)
Deferred tax asset before change in tax
12 $38,500
rate (row 8, col. 4 x 0.35)
13 Increase in deferred tax balance $3,750 $5,500
14 Debit/ (Credit) tax expense (income) $3,750 ($5,500)

A is incorrect. The answer treats the temporary differences as deductible differences and vice versa.

B is incorrect. This answer excludes the consequences of the unused tax losses from the entry.
Therefore, the deferred tax asset after and before the change in the tax rate are assumed to be:

$
Deferred tax asset after $50,000 x 0.35 = $17,500
Deferred tax asset before $50,000 x 0.30 = $15,000
Change in deferred tax
$2,500
asset

C is incorrect. The rental revenue received in advance is regarded as giving rise to a taxable
temporary difference. Therefore, the totals of the deductible and taxable amounts, and the resulting

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changes in the deferred tax asset and deferred tax liability, are treated as being:

$
Change in deferred tax asset:
total deductible amount x (0.35 - 0.30) = $70,000 x 0.05 = $3,500
Change in deferred tax liability:
total taxable amount x (0.35 - 0.30) = $115,000 x 0.05 = $5,750
Tax expense $2,250

Module: 4 > Part: B > 4.5 Recognition of deferred tax assets > Initial
recognition of other assets or liabilities not in a business combination
transaction (IAS 12, para. 15(b)) > Page: 181

Question 10 Marks: 0
According to IAS 12 Income Taxes, in which of the following situations is a deferred tax asset most
likely to be recognised?

Answer Options
You answered B. The correct answer is D

USER SELECTION CORRECT ANSWER

In a newly opened dental office that is not sure when it will begin to see
A
taxable profits.

In a previously unprofitable law firm that is planning a new marketing

B
campaign to start after its unused tax credits expire.

In a bookstore whose assets are currently valued at more than their

C applicable tax bases. The recognition criteria for deferred tax assets is
satisfied.

In a small bakery whose unused tax losses resulted from an accidental fire
D that temporarily closed the bakery. The recognition criteria for deferred tax
assets is satisfied.

Answer Explanation

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D is correct because the unused tax losses result from identifiable causes that are unlikely to recur,
the organisation meets the criteria.

A is incorrect. Taxable profits must be probable in this case.

B is incorrect because taxable profits must be seen before the unused tax losses or tax credits
expire, not after.

C is incorrect because this would result in taxable temporary differences.

Module: 4 > Part: B > 4.5 Recognition of deferred tax assets >
Recognition rules for unused tax losses and unused tax credits >
Page: 186

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