M3: Liabilities (IAS 12 Income Taxes)

Question 1

What are the different ways we treat the following taxes:
- Tax on profits
- Tax on Revaluation of Non-current Assets, Exchange differences arising on translation of FS of a foreign operation
- Adjustments to Retained earnings as a result of error/accounting policy, Amounts arising on initial recognition of a equity component of a compound instrument

Answer 1

Tax on profits - Expense through SPL

Tax on Reval NCA and Exchange Diff = Expense through OCI

Tax on Adjustments to RE/Initial recognition. Equity Comp = Recognise in Equity

Question 2

What are the four instalment dates that big companies pay their tax to HMRC for Corporation tax on?

Answer 2

TWO PAYMENTS PRIOR TO YE:
- 14th day of the 7TH AND 10TH MONTH

TO PAYMENTS POST YE:
- 14th day of the 13TH AND 16TH MONTH

Question 3

If a large company has a year end of 31/12/2024, when are their 4 corporation tax payments due?

Answer 3

PRE-YEAR END:
14th day month 7 = 14th July 2024
14th day month 10 = 14th October 2024

POST-YEAR END:
14th day month 13 = 14th January 2025
14th day month 16 = 14th April 2025

Question 4

What journal entries would be recorded by a business if there has been 2 payments in July and October and 2 remaining after the year end of 31.12.2024?

Total tax liability of £3m

Answer 4

Journal entries to record payments:
Dr SPL - Current tax expense 750,000
Cr Bank 750,000
Being payment of taxation instalment on 14 July and 14 Oct

Journal entry to record remaining two instalments
Dr SPL - Current tax expense 1,500,000
Cr Taxation payable 1,500,000
Being provision for the remaining tax charge

Question 5

What happens in the following three tax scenarios and what journal entries should be made:
- Underpaid tax for current and prior years
- Overpaid tax for current and prior years
- Tax losses carried back to prior periods

Answer 5

Underpaid tax = Tax liability in the SoFP
Dr Taxation SPL
Cr Taxation payable

Overpaid Tax = Tax asset in the SoFP
Dr Tax receivable
Cr Taxation SPL

Tax losses = Tax asset in the SoFP
Dr Other receivables
Cr Taxation SPL

Question 6

Where do we see taxation disclosed in the financial statements?

SOFOP
SPLOCI
SOCF
Disclosure notes

Answer 6

SOFP: Separate tax payable on the face of the current liabilities. Otherwise included in “trade and other payables” with a breakdown in the notes.

SPLOCI: Separate line for taxation on the face of the SPL as well as separate disclosure for taxation of any items in OCI

SOCF: Taxation paid is separately disclosed in the operating activities section of the SOCF.

Disclosure notes to the financial statements:
 Reconciliation of the accounting profit to the taxation expense,
 Details of the composition of the taxation charge in the SPL and detailing the tax per item charged to OCI.

Question 7

After the year-end what journals would need to be made to account for corporation tax and a new estimate based on the below information:

750k payment in July and October
1.5m Recorded tax liability at YE of 31/12/2024
4m Estimate for the following year
50k under-provision that was paid in June

Answer 7

We need to reversal the 1.5m tax liability for the two payments made post-year end. These journals will be :

Dr Taxation payable 750,000
Cr Bank 750,000

We need to record the new July and October instalments:
Each instalment will be recorded as below
Dr SPL - Current tax expense 1,000,000
Cr Bank 1,000,000

We need to recognise the 2m remaining tax liability at YE:
Dr SPL - Current tax expense 2,000,000
Cr Taxation payable 2,000,000

Under-provision of 50k
Dr SPL - Current tax expense 50,000
Cr Bank 50,000