Jemma is an accounting student intern who has just begun her internship in Fabulous Furniture Bhd. Jemma has been asked by Mr. Hardy, the chief financial officer of the company to account for the companys income taxes affairs. Fabulous Furniture Bhd is a company which focuses on the production of furniture from raw timber. The company began its operation on 1 January 2017. Jemma found out from records that the financial profits from the operation of Fabulous Furniture Bhd for the first two years are as depicted in the following table:

2017 RM300,000

2018 RM700,000

In addition to this information, Jemma found that the differences between the pretax finanacial profits and the taxable profits are caused by the following items:

(1) Fabulous Furniture Bhd has unoccupied building in Pavilion, Kuala Lumpur that the company rents out to Mega Star Bhd since 1 June 2017. Since the area is located in the Kuala Lumpur's "golden triangle", Fabulous Furniture Bhd managed to rent out the building at a very handsome price. Accordingly, Fabulous Furniture Bhd collected RM 100,000 of rent in advance from Mega Star Bhd in the financial year 2017. Out of this amount, RM75,000 was earned in 2017; whilst the remaining RM25,000 will be earned equally over the 2018-2019 period.

(2) The company was found guilty for emission of industrial effluent by the Department of Environment (DOE), a government department under the Ministry of Environment (MOE) that enforces the compliance of environmental regulation. Accordingly, Fabulous Furniture Bhd was fined RM12,500 for pollution.

(3) Fabulous Furniture Bhd provides for warranty for all its furniture product. The warranty expenses estimated for financial reporting purposes in 2018 amount to RM26,500. Meanwhile, the warranty deductions per the tax return amount to RM9,200.

(4) In 2018, Fabulous Furniture Bhd terminated Mr Freddy, a top executive in the company. Fabulous Furniture Bhd agreed to pay Mr Freddy RM93,750 to compensate for his termination which has been made effective before his contract ends. The amount be paid RM31,250 per year for the financial years 2018-2020. The 2018 payment has already been made by Fabulous Furniture Bhd. Value amounting to RM93,750 was expensed off in 2018 as per accounting records. For tax purposes, the payment is only deductible if it is paid.

(5) Assume corporate taxation rate is at 26%.

Jemma was not quite sure on how to provide for the accounting treatment for the above and has sought help from you, a senior accountant to assist her in her assignment.

*REQUIRED* :

a) Discuss whether the building in Pavilion, Kuala Lumpur meets the definition of a Property, Plant and Equipment (PPE) under the scope of the MFRS 116 Property, Plant and Equipment or an Investment Property under the scope of MFRS 140 Investment Property. Give reasons for your decision. (3 marks)

b) Calculate the taxable income of Fabulous Furniture Bhd for the years 2017 and 2018. (4 marks)

c) Calculate the deferred income taxes at the end of 2017; and prepare the journal entry to record income taxes for financial year 2017. (4 marks)

d) Determine the amount of deferred tax that recognized as expense in 2018and prepare the journal entry to record income taxes for financial year 2018. Show alf computations and workings. (5 marks)

e) Explain what are "temporary" and "permanent" differences. Discuss which of the items in (1) to (4) on pages 2 to 3 above are "temporary" and "permanent" differences,qustifying your answer with appropriate references to the standard MFRS 112 Income Taxesf these are "temporary differences", state whether the items are taxable or deductible temporary differences (4 marks)