Question Two

1. a) Explain why accounting profit is usually not equal to taxable income. Provide an example of an item that requires different treatment for accounting and tax purposes.

2. b) Explain how the Development Costs account can lead to the recognition of a Deferred Tax Liability.

3. c) At 30 June 2017, Gillian Ltd has reported two assets:

Machine A Accumulated depreciation Machine B Accumulated depreciation

$100,000 (40,000) $ 60,000 $60,000 (24,000) $ 36,000

$96,000

Machine A was acquired on 1 July 2015, and was assessed to have an expected useful life of 5 years. Machine B was acquired on 1 July 2013, and was assessed to have an expected useful life of 10 years. For both Machine A and B, the company calculated depreciation expenses on a straight-line basis.

On 31 December 2017, Gillian Ltd decided to change the basis of measuring the two assets from the cost model to the revaluation model. Machine A was revalued to $57,000 with an expected useful life of 4 years. Machine B was revalued to $30,000 with an expected useful life of 6 years.

The tax rate is 30%.

Required

Prepare the journal entries at 31 December 2017 in relation to Machine A and B. Narrations are not required.