QUESTION TWO [35] Ben, a good friend of yours, started his serving his articles at AccountingInc. His manager requested him to research a few queries on deferred tax for a client. Ben, is distressed as Derred Tax is the one section that he could not fully grasp during his studies. He has therefore called you to help with the following queries:

1. When should a deferred tax asset or a deferred tax liability be recognised? (3)

2. Give 3 instances which will give rise to a deferred tax asset? (3)

3. What rate should be used to calculate deferred tax? (1)

4. Are there any circumstances where the timing difference will not be recognised? (2)

5. How should deferred tax be disclosed on the Statement of Financial Position (1)

6. Medicare Limited is a company that operates in the pharmaceutical industry, manufacturing vaccines. Due to the current pandemic and the urgent and immediate need for vaccines to protect against COVID 19, the company decided to replace its existing plant, which is only 2 years old, with a new plant capable of manufacturing this COVID 19 vaccine. Details of the old plant are as follows:

ADDITIONAL INFORMATION

1. Depreciation is written off at 15% per annum on a straight-line basis on the old plant with zero residual values. Wear and tear is over 5 years on the full cost of the plant, not apportioned from the date the plant was brought into use.

2. On the 30 June 2020, the old plant was withdrawn and sold for an amount of R461 000.

3. On the 1 July 2020, the new plant with a cost of R800 000 was brought into use.

4. The directors of Medicare Limited, decided to depreciate the plant over 4 years on a straightline basis.

5. The company had a profit before tax of R1 000 000 before taking the above into account

. 6. Dividend income of R30 000 (exempt from tax) and fines of R9 000 (not tax deductible) are included in the profit of R1 000 000.

7. The insurance company decided to do a double debit for insurance premiums in December this year relating to December and for January, the next year. The amount relating to January 2021 was R8 000.

8. SARS allows prepaid expenses as deduction in the year in which they were paid.

9. The company received Rent income for January 2021 in December 2020 and SARS regards this as income received in 2020.Amount received R12 000.

10. Normal tax rate is at 28%.

REQUIRED

a) Calculate the profit on the sale of the old plant. (3)

b) Calculate the carrying amount of the new plant at the end of December 2020 (3)

c) Calculate the current normal tax and for the year ending 31 December 2020 (9)

d) Prepare the Income Tax expense Note for the year ending 31 December 2020 (4)

e) Prepare the journal entries for current and deferred tax for the year ended 31 December 2020 (6)