1.-Copyright © 2020 McGraw-Hill Education (Australia) Pty

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Copyright © 2020 McGraw-Hill Education (Australia) Pty Ltd
Deegan, Financial Accounting 9e
18-*
Chapter 18
Accounting for
income taxes
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Introduction to accounting for income taxes
Understand the difference between accounting profit and
taxable income
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Some differences between accounting and tax
rulesItemGenerally accepted accounting ruleTax ruleMany
accrued expenses (e.g. long-service leave, warranty costs)An
expense when accruedRecognised as a tax deduction when
paidMany prepaid expenses (e.g. prepaid rent)Initially an
asset—expensed when economic benefits usedTypically a tax
deduction when paidRevenue received in advance (e.g. rental
revenue)Treated as a liability and recognised as revenue when
earnedTypically taxed when receivedEntertainment and
goodwill impairmentTreated as an expenseNot a tax deduction
in current or subsequent periodsDoubtful debtsTreated as an
expense when recognisedTreated as a tax deduction when debtor
is actually written off in subsequent periodDevelopment
expenditureOften capitalised and subsequently
amortisedTypically a tax deduction when paid for
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Balance sheet approach to accounting for taxation
Accounting for income taxesGoverned by AASB 112 Income
Taxes
Balance sheet methodDTA ad DTL
Carrying Amount (CA) – Book value
Tax base – taxation rules
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Rules and Format
TTD – taxable temporary difference – deferred tax liability
DTD – deductible temporary difference – deferred tax asset
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Have a read of the facts in Worked Example 18.2
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Rules and Format
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Have a read of the following slides on your ownThese are a
summary of the chapter and I have already discussed the points
during the Podcasts

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Measurement of DTAs and DTLs (cont.)
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Balance sheet approach to accounting for taxation (cont.)
Temporary differences can be of two types
A taxable temporary difference
will result in an increase (decrease) in income tax payable
(recoverable) in future periods when the carrying amount of the
asset or liability is recovered or settled
Creates a liability—deferred tax liability
A deductible temporary difference
will result in a decrease (increase) in income tax payable
(recoverable) in future periods when the carrying amount of the
asset or liability is recovered or settled
Creates an asset—deferred tax asset
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Deferred tax liability
The carrying amount of the asset exceeds the tax base
Taxation payments have effectively been deferred to future
periods
Tax is reduced or ‘saved’ in early years, but additional tax will
need to be paid later
Example of deferred tax liability
Carrying amount of a non-current depreciable asset exceeds the
tax base in early years, as depreciation allowable as a deduction
for tax purposes is greater than depreciation for accounting
purposes
This will be reversed in later years when no depreciation is
allowable for tax purposes
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Deferred tax asset
The carrying amount of an asset is less than the tax base

Example of deferred tax assetTax base of a depreciable asset
exceeds the carrying amount in early years, as depreciation
allowable as a deduction for tax purposes is less than
depreciation for accounting purposes This will be reversed in
later years when the asset is fully depreciated for accounting
purposes, but depreciation is still allowable as a deduction for
tax purposes
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Income tax expenseRepresents the sum of the tax attributable to
taxable income, plus or minus any adjustments relating to
temporary differencesIncome tax expense is defined in AASB
112 as:
the aggregate amount included in the determination of profit or
loss for the period in respect of current tax and deferred tax

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Reversal in future periodsIn future periods, timing differences
will reverse
Deferred tax asset will be credited
Deferred tax liability will be debited
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Temporary differences, deferred tax assets and liabilities —
summary
REMEMBER THESE!
AssetsLiabilities
Carrying amount
>
tax base
Taxable temporary difference

Deferred tax liabilityDeductible temporary difference
Deferred tax asset
Carrying amount
<
tax baseDeductible temporary difference
Deferred tax assetTaxable temporary difference
Deferred tax liability
Format of the Deferred Tax WorksheetRefer to Page 752
DTADTL
CAFDAFTATBDTDTTDDifference
+-

Assets
Cash3000030000--
Inventory8000080000--
Accounts receivable9000090000--
Prepaid insurance40004000040004000
Plant225000200000025000225000
DTADTL
CAFDAFTATBDTDTTD
-+
Liabilities
Accounts payable5000050000--
Provision for warranty expense150001500001500015000
Loan payable154000154000--
Provision for LSL100001000001000010000
Total temp diff2500029000
DTA7500
DTL8700
ITE - Income Tax expense97800Taxable income x 30%
From this infomration construct your entry
Dr DTA7500
Dr ITE97800
Cr DTL8700
Cr Income tax payable96600
TB (Assets)CA + FDA –FTA = TBCA > TB = DTLCA < TB =
DTATB (Liabilities)CA –FDA + FTA = TBCA > TB = DTA, CA
< TB = DTLException –RRIA (Revenue received in advance)CA
–amount of revenue received in advance that will not be subject
to tax in future periods = TB
This slide must always be at the start of your presentation

1
Shareholders’ Equity
Podcast #2
Slide instructions:
This slide must be in layer order as listed below:
From back to front:
Coloured background – you can change the colour of the
background following the instructions on the colour palete page.
Transparent image – image should be between to 60-80%
transparent.
Grey triangle top left
White lines bottom right
Text bottom left – Ariel – Bold, 50, White – the line has a small
fade in animation
2
Oversubscription of shares
When more shares are applied for than the number to be
issued—quite common
Two approaches to manage oversubscription:
Satisfy full demand of a certain number of subscribers and

refund the funds advanced by others
Issue shares to all subscribers on a pro rata basis
Accounting for dividends
Once the final profit for the year has been calculated, which is
after the end of the financial year, the directors are in a position
to decide on the amount of final dividends to allocate to
shareholders
Redemption of preference shares
Under s. 254 (J) and (K) of the Corporations Act, shares are to
be redeemed:
out of profits that would otherwise be available for dividends,
or
out of proceeds of a fresh issue of shares made for the purposes
of the redemption
Forfeited shares

Shares can be forfeited if:
shares are issued as partly paid and shareholders do not
subsequently pay the amounts due on allotment or on calls
a shareholder ceases to be a member of the company at that time
Forfeited shares (continued)
Various outcomes
If company is listed on the ASX or if company’s operating rules
allow it, a refund is paid to the investor less costs incurred in
reissuing shares
Amounts paid are recorded in a forfeited shares account
(liability) until refunded
If company is not listed on the ASX and constitution says
nothing about refunds, company can retain the amounts paid
less costs of reissuing shares
– Amounts paid are held in a forfeited shares reserve (part of
shareholders’ funds)
Share splits and bonus issues
Share splits
Subdivision of the company’s shares into shares of smaller
value

Share splits and bonus issues (cont.)
Bonus shares
Existing shareholders receive additional shares, at no cost, in
proportion to their shareholding at the date of the bonus issue
Journal entry
DebitRetained earnings
CreditShare capital—ordinary shares
Bonus shares from retained earnings often referred to as a bonus
share dividend
Rights issues and share options
A rights issue provides existing shareholders with the right to
acquire additional shares typically at an ‘attractive’ price
Share options give the holder the right to acquire shares in the
future at a particular price
Required disclosures for share capital

AASB 101 requires disclosure of the following:
For each class of share capital
Number of shares authorised
Number of shares issued and fully paid, and issued but not fully
paid
Reconciliation of number of shares outstanding at beginning and
end of period
Rights, preferences and restrictions of the class
Shares reserved for issue under options and contracts for sale of
shares
Shares in the entity held by the entity or by subsidiaries or
associates
Description of nature and purpose of each reserve within equity
Reserves
Include:
revaluation surplus
general reserve
Required to disclose (AASB 101):
The statement of changes in equity provides a reconciliation
between the opening and closing amount of each share capital
and reserve account
The statement of changes in equity includes the following
information:

total comprehensive income for the period, showing separately
the total amounts attributable to owners of the parent and to
non-controlling interest,
for each component of equity, the effects of retrospective
application or retrospective restatement recognised in
accordance with AASB 108, and
for each component of equity, a reconciliation between the
carrying amount at the beginning and the end of the period,
separately disclosing changes resulting from:
- (i) profit or loss
- (ii) other comprehensive income and
- (iii) transactions with owner in their capacity as owners,
showing separately contributions by and distributions to owners
and changes in ownership interests in subsidiaries that do not
result in a loss of control
This slide must always be at the start of your presentation
1
Module 1 – Worked Example: Issue of Partly Paid Shares

Slide instructions:
From back to front:
Coloured background – you can change the colour of the
background following the instructions on the colour palete page.
Transparent image – image should be between to 60-80%
transparent.
Grey triangle top left
White lines bottom right
Text bottom left – Ariel – Bold, 50, White – the line has a small
fade in animation
2
Worked Example: Issue of Partly Paid Shares
Yeates Ltd commenced operations on 1 July 2019 by issuing 15
million ordinary shares by way of a direct private placement
and at an issue price of $1.50 per share.
Shareholders were required to pay $1.00 on application, with a
further $0.35 payable on 1 September 2019 and a further

$0.15 payable on 1 December 2019.
Slide instructions:
From back to front:
Image – you can change this image for your need.
Large triangle left – you can change the colour to suit your
school if desired using colours and instructions from the palete
page
Grey transparent banner –do not change colour
Text middle – you can change text but do not change colour or
font
Footer including logo– the footer must never be moved,
however you can change the text on the left
3
Solution

Slide instructions:
From back to front:
Image – you can change this image for your need.
Large triangle left – you can change the colour to suit your
school if desired using colours and instructions from the palete
page
Grey transparent banner –do not change colour
Text middle – you can change text but do not change colour or
font
Footer including logo– the footer must never be moved,
however you can change the text on the left
4
Presentation title – Arial Bold 8

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