Question
Hippo & Cat Limited (H&C) is a retailer of fashion in the region. It grows quickly in the year. Hippo, the CEO, is concerned about
Hippo & Cat Limited (H&C) is a retailer of fashion in the region. It grows quickly in the year. Hippo, the CEO, is concerned about H&C's tax position and asks Cat, the CFO, to estimate the tax liability for review. Below are the extracts of the final (draft) statement of financial position of H&C as at 31 December 2019 (2020).
2019
Non-current assets
Property, plant and equipment at cost $400,000
Accumulated depreciation -$80,000
Deferred tax assets $8,000
Current assets
Prepaid rent $0
Non-current liabilities
Deferred tax liabilities $4,000
Provision for employee benefits $40
Current liabilities
Accrued revenue $0
2020
Non-current assets
Property, plant and equipment at cost $400,000
Accumulated depreciation -$120,000
Deferred tax assets $?
Current assets
Prepaid rent $20
Non-current liabilities
Deferred tax liabilities $?
Provision for employee benefits $55
Current liabilities
Accrued revenue $10
The following information is also relevant.
1. Tax rate is 20% for 2019 and 2020.
2. The property, plant and equipment was purchased on 1 January 2018 and has ten years' life and is depreciated on a straight-line basis. For tax purposes, it is granted allowance over eight years with equal amount every year.
3. Rental payment is allowed for tax purposes on cash basis.
4. Provision for employee retirement benefits is not allowed for tax purposes until the benefits are paid. For the year ended 31 December 2020, $10,000 was paid to retired employees.
5. Accrued revenue is taxed on cash basis.
6. The deferred tax asset and liability as at 31 December 2019 relate to $8,000 employee benefits and $4,000 future tax depreciation for plant, property and equipment respectively.
7. Accounting profit before tax is $100,000 for the year ended 31 December 2020.
Required
According to HKAS 12 Income Taxes,
1. Calculate deferred tax assets and deferred tax liabilities of H&C as at 31 December 2020 using the asset/liability approach, and the change thereof during the year. (10 marks)
2. Give the accounting journal entries for H&C's deferred income tax for the year ended 31 December 2020. (3 marks)
3. Do a profit tax computation to show taxable profit of H&C for the year ended 31 December 2020. (5 marks)
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