QUESTION 4

At 30 June 2019, Lanark Ltd recognised a deferred tax asset of $13,500 and a deferred tax liability of $18,000. This has resulted to a company tax rate of 30%. The ATO has decided to raise more revenue in future from companies by way of taxation. It announced that it will increase the tax rate as of 1 July 2019 to 35%. In its deferred tax worksheet for the year ending 30 June 2020, Lanark Ltd calculated that its taxable temporary differences were $4,500 and its deductible temporary differences were $13,500.

REQUIRED

1. Explain to the chief accountant on how the increase in the tax rate will affect the application of tax-effect accounting for the year ended 30 June 2020. Show supporting calculations in detail.

2. Prepare the journal entry on 1 July 2019 to reflect the changes. Identify which accounts the temporary differences will impact.

(6 + 4 = 10 marks)