Q 4.1

In the 2020 fiscal year, Company A recognized $10 of bad-debt expense (as well as the same amount of bad-debt allowance) for its Accounts receivable. There was no bad-debt written-off in the same year. The corporate tax rate is 30%.

Required: Assuming all else equal, discuss the effect of the recognition of the $10 bad-debt expense on the following two tax-related accounts:

• Current tax liability
• Deferred tax asset (or deferred tax liability)

You need to relate your discussions to the current tax worksheet as well as deferred tax worksheet.

Q.4.2

In the 2020 fiscal year, Company B reported an accounting profit of $1,000. In the same year, the accounting depreciation expense for plant was $150, while the tax deduction for plant depreciation was $200. There was no other difference between accounting and tax in the year. In the 2019 fiscal year, the company recorded a tax loss ($300) and recognized a deferred tax asset in respect of this tax loss. In the 2020 fiscal year, the company reduced the taxable profit by recouping the tax losses carried forward. The company does not set off deferred tax liabilities and assets. The corporate tax rate is 30%.

1. Required: Provide the journal entries for the current tax adjustment. Workings (or narrations) are not required.

2. Now assume that Company Bs accounting profit in the 2020 fiscal year includes $55 of government grant which is exempt from tax. Also, assume that tax losses carried forward must be offset against any exempt income before being used to reduce taxable profit.

Required: Under these additional assumptions, provide the journal entries for the current tax adjustment. Workings (or explanations) are not required.