ACCA FR · Chapter 9
Taxation MCQs with Answers
8 multiple-choice questions on Taxation for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Last year Teal Co estimated its income tax liability at $400,000, but the amount finally agreed and paid was $430,000. For the current year it estimates income tax of $520,000. Ignoring deferred tax, what is the tax charge in the current year's statement of profit or loss?
- A) $550,000
- B) $520,000
- C) $490,000
- D) $950,000
Show answer & explanation
Answer: A) $550,000
The tax charge is the current year estimate plus last year's under-provision. Under-provision = $430,000 - $400,000 = $30,000. Tax charge = $520,000 + $30,000 = $550,000. The liability in the SFP is the current estimate of $520,000, because last year's liability has been settled.
Question 2
Under IAS 12, deferred tax is calculated on temporary differences. What is a temporary difference?
- A) The difference between accounting profit and taxable profit for the year
- B) The difference between the tax charge and the tax paid in the year
- C) Income or expense that will never be taxable or deductible
- D) The difference between the carrying amount of an asset or liability and its tax base
Show answer & explanation
Answer: D) The difference between the carrying amount of an asset or liability and its tax base
IAS 12 uses a balance sheet approach. A temporary difference is the difference between the carrying amount of an asset or liability in the SFP and its tax base. Items that are never taxable or deductible are permanent differences and do not give rise to deferred tax.
Question 3
At the year end Eider Co's plant and equipment has a carrying amount of $800,000 and a tax base (tax written down value) of $600,000. The tax rate is 25%. What deferred tax balance arises?
- A) Deferred tax asset of $50,000
- B) Deferred tax liability of $150,000
- C) Deferred tax liability of $50,000
- D) Deferred tax liability of $200,000
Show answer & explanation
Answer: C) Deferred tax liability of $50,000
Taxable temporary difference = $800,000 - $600,000 = $200,000. When an asset's carrying amount is higher than its tax base, more tax will be payable in future, so a deferred tax liability arises: $200,000 x 25% = $50,000.
Question 4
Scaup Co's deferred tax liability was $60,000 at the start of the year. At the year end its taxable temporary differences, all relating to plant, total $320,000, and the tax rate is 25%. The current tax estimate for the year is $300,000. What is the total tax charge in profit or loss?
- A) $380,000
- B) $300,000
- C) $280,000
- D) $320,000
Show answer & explanation
Answer: D) $320,000
Closing deferred tax liability = $320,000 x 25% = $80,000. Increase in the year = $80,000 - $60,000 = $20,000, which is charged to profit or loss because it relates to plant. Total tax charge = current tax $300,000 + deferred tax $20,000 = $320,000.
Question 5
During the year Smew Co revalued its land upwards by $400,000. The revaluation does not affect taxable profit, but the land would be taxed if sold at its revalued amount. The tax rate is 20%. How should the deferred tax on the revaluation be recognised?
- A) Deferred tax liability of $80,000 charged to OCI, so the revaluation surplus is $320,000 net
- B) Deferred tax liability of $80,000 charged to profit or loss
- C) No deferred tax, because land is not depreciated
- D) Deferred tax asset of $80,000 credited to OCI
Show answer & explanation
Answer: A) Deferred tax liability of $80,000 charged to OCI, so the revaluation surplus is $320,000 net
The revaluation makes the carrying amount higher than the tax base, creating a taxable temporary difference of $400,000 and a deferred tax liability of $400,000 x 20% = $80,000. IAS 12 requires deferred tax to be recognised in the same place as the item it relates to. The revaluation gain is in OCI, so the deferred tax is charged to OCI, leaving a net surplus of $320,000.
Question 6
Which of the following would normally give rise to a deferred tax ASSET?
- A) Accelerated tax depreciation on plant (tax allowances higher than accounting depreciation)
- B) An upward revaluation of a building
- C) A warranty provision whose costs are deductible for tax only when the repairs are paid for
- D) A fine for breaking regulations that is never tax-deductible
Show answer & explanation
Answer: C) A warranty provision whose costs are deductible for tax only when the repairs are paid for
A provision whose cost is deductible only when paid has a tax base of nil. The carrying amount of the liability is higher than its tax base, which is a deductible temporary difference and gives a deferred tax asset. Accelerated tax allowances and revaluations create deferred tax liabilities. A non-deductible fine is a permanent difference.
Question 7
Which of the following statements about measuring deferred tax under IAS 12 is correct?
- A) Deferred tax is measured at the current year's tax rate and discounted to present value
- B) Deferred tax is measured at the tax rates expected to apply when the difference reverses, based on rates enacted or substantively enacted by the reporting date, and it is not discounted
- C) Deferred tax is measured at the rate expected to apply in the future, even if that rate has not yet been enacted
- D) Deferred tax liabilities are discounted, but deferred tax assets are not
Show answer & explanation
Answer: B) Deferred tax is measured at the tax rates expected to apply when the difference reverses, based on rates enacted or substantively enacted by the reporting date, and it is not discounted
IAS 12 measures deferred tax using the rates expected to apply when the asset is realised or the liability settled, based on laws enacted or substantively enacted by the reporting date. Discounting deferred tax balances is prohibited.
Question 8
At the start of the year Pochard Co had a deferred tax liability of $150,000. During the year taxable temporary differences on plant increased by $100,000, and a property revaluation created a further taxable temporary difference of $200,000. The tax rate is 25%. What is the closing deferred tax liability, and what deferred tax is charged to profit or loss?
- A) Closing liability $225,000; $75,000 charged to profit or loss
- B) Closing liability $175,000; $25,000 charged to profit or loss
- C) Closing liability $225,000; $25,000 charged to profit or loss
- D) Closing liability $225,000; nil charged to profit or loss, as all deferred tax goes to OCI
Show answer & explanation
Answer: C) Closing liability $225,000; $25,000 charged to profit or loss
Increase on plant = $100,000 x 25% = $25,000, charged to profit or loss. Increase from the revaluation = $200,000 x 25% = $50,000, charged to OCI. Closing liability = $150,000 + $25,000 + $50,000 = $225,000.