IAS 12, Income Tax, was issued in 1996 and revised in 2000. It details the requirements relating to the accounting treatment of deferred tax.
Required:
Explain why it is considered necessary to provide for deferred tax and briefly outline the principles of accounting for deferred tax contained in IAS 12, Income Tax.
(ii) Bowtock purchased an item of plant for $2 000 000 on 1 October 2000. It had an estimated life of eight years and an estimated residual value of $400 000. The plant is depreciated on straight line basis. The tax authorities do not allow depreciation as a deductible expense. Instead, a tax expense of 40% of the cost of this type of asset can be claimed against income tax in the year of purchase and 20% p.a. (on a reducing balance basis) of its tax base thereafter. The rate of income tax can be taken as 25%.
Required:
In respect of the above item of plant, calculate the deferred tax charge/credit in Bowtock's income statement for the year to 30 September 2003 and the deferred tax balance in the balance sheet at that date.
Note: Work to the nearest $000.