Question 2: (20 Marks)

As at the year ended 31 December 2018, assets and liabilities as disclosed in statement of financial position of Orange Ltd are as follow:

Assets:	HK$	HK$
Cash		30,000
Inventory		80,000
Accounts receivable		90,000
Prepaid insurance		4,000
Deferred tax assets		16,000
Plant cost	300,000
Less: Accumulated depreciation	75,000	225,000
Total assets		445,000
Liabilities:
Accounts payable		50,000
Provision for warranty expenses		15,000
Loan payable		154,000
Provision for employee benefits		10,000
Deferred tax liability		30,000
Total liabilities		259,000
Net assets		186,000

Other information:

1. None of the provision for employee benefits expense has actually been paid. It is not deductible for tax purpose until it is actually paid. Tax base: 0

2. Provision for warranty expenses is related to products warranty services. Warranty expenses were accrued and, at year end, actual payments of $5,000 were made (leaving an accrued balance of $15,000). Deductions for tax purpose are available only when the amounts are paid, and not as they are accrued.

3. Insurance was initially prepaid to the amount of $14,000. At year end, the unused component of the prepaid insurance amounted to $4,000. Actual amounts paid are allowed as a tax deduction.

4. Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.

5. The plant was purchased in 2018. It is Oranges accounting policy to measure its property, plant and equipment at cost less subsequent depreciation. Full year depreciation will be provided for in the year of purchase and nil residual value is assumed. The plant is depreciated by a straight-line basis over four years of its useful life for accounting purposes, but over three years for taxation purpose.

6. After adjusting for differences between tax rules and accounting rules, it is determined that the taxable income of Orange Ltd. is $40,000.

7. As at 31 December 2017, the balances of deferred tax accounts in the statement of financial position before adjustment were:

Deferred tax asset $16,000 (coming from tax losses carried forward)

Deferred tax liability $30,000

Management was able to estimate enough taxable profits for utilizing the carried

forward tax losses in the previous years. All of the deferred tax assets were

derived from the tax losses that incurred in the previous years.

8. As at year ended 2018, the management estimated the taxable profit for the forthcoming years as follows:

2019 $20,000

2020 $40,000

2021 and beyond no estimation is available

9. The announced income tax rate for 2018 and thereafter was 20%.

Required:

1. Calculate the amount of each of Oranges temporary differences, if any, at 31 December 2018, and state whether it is deductible or taxable. Show your workings and provide your answer with the following format.

Items of Assets and liabilities	Carrying amount of Assets and Liabilities	Tax bases of assets and liabilities	Deductible Temporary Differences	Taxable Temporary Differences

(8 marks)

2. What is the balance of the deferred tax liability and deferred tax assets, if any, as at 31 December 2018? (8 marks)

3. Prepare journal entries to record current tax and deferred tax for the year ended 31 December 2018. (4 marks)