Deferred tax accounting: taxable temporary differences II Refer to P17.2. Columbara is so pleased with the special labelling equipment it purchased in x5 that it decides to buy an additional machine each year until it has a stock of four. Each machine is expected to cost 120 and will be depreciated – for book and tax purposes – in the same way as the x5 purchase. Profit (before depreciation and tax) was 100 in x5. It is expected to grow by 30 a year until x8 and then remain at 190 in x9. The tax rate is 35% in x5 and is expected to stay at this level through x9.

Required

(a) Calculate Columbara’s income tax payable, income tax expense and deferred tax liability or asset for each of the five years, x5–x9.

(b) An investor looks at your calculations and remarks:

‘What the Columbara figures for x8 and x9 show is that when a company has stable earnings, most if not all of its total tax expense is current. Originating temporary differences on new assets and liabilities offset reversing temporary differences on old ones so that the company’s deferred tax asset or liability shows little change and its deferred tax expense is zero or close to zero.’

Comment on these observations. Under what conditions is the deferred component of tax expense

‘zero or close to zero’? Do these conditions only apply when earnings are stable?

Check figure:

(a) Taxable profit, x7 52 AppenedixLO1