Question 2

The following information relates to Frest Ltd, a manufacturer of freezers, for the financial year ended 30 June 2017:

1. Profit before tax for the year amounted to N$495 000.

2. Included in profit before tax is dividends received of N$25 000.

3. Included in the profit before tax are the following non-deductible/taxable items according to the Namibian tax authorities: Donations paid 2,000.00 Incentive allowance received 16,000.00

4. On 2 July 2016 Frest Ltd bought new equipment for N$205 000. Equipment is depreciated according to the straight-line method over 5 years. The depreciation charge for the current year is included in profit before tax. Tax authorities allow a tax allowance on equipment over 4 years.

5. On 1 July 2016, equipment was destroyed by a fire as a result of lightning. The profit realised on this equipment is included in the profit before tax. Information regarding this equipment is as follows: Insurance claim received 125,000.00 Cost of equipment 160,000.00 Carrying amount at 1 July 2016 96,000.00 Tax base on 1 July 2016 80,000.00

6. The accounts receivable balance at year-end consisted of the following: 2017 2016 Total amount outstanding 102,000 97,000 Allowance for credit losses {14,000} 6,800} The Namibian tax authorities allow only 25% of the allowance for credit losses as a tax deduction.

7. The company sells freezers with a two year warranty. The company provides for warranty costs in its annual financial statements. This provision is not deductible for tax purposes, but the actual warranty costs paid are deductible. The balance of the provision for warranty costs in statement of financial position of Frest Ltd on 30 June 2017 and 30 June 2016 amounted to N$32 000 and N$40 000 respectively. Actual warranties paid during the current year amounted to N$36 000 and was debited against the provision for warranty costs.

8.The deferred tax asset balance on 30 June 2016 amounted to N$8 410. Deferred tax is provided for on all temporary differences according to the statement of financial position approach. There are no other temporary differences except those mentioned in the question. There is certainty beyond any reasonable doubt that there will be sufficient future taxable profit against which any tax losses may be utilized.

9.The Normal tax rate was 29% in 2016 and changed to 28% in 2017.

Reguired

a) Calculate the current tax expense in the statement of profit or loss and other comprehensive income of Frest Ltd for the year ended 30 June 2017.

b) Calculate the deferred tax balance in the statement of financial position of Frest Ltd for the year ended 30 June 2017, by using the statement of financial position approach. List all temporary differences and indicate next to each temporary difference whether it results in a deferred tax asset or a deferred tax liability.

c) Prepare the journal entry to record the deferred tax movement in the statement of profit or loss and other comprehensive income of Frest Ltd for the year ended 30 June 2017.