• A debit balance on the tax account (GH¢17,500) represents under provision of tax for the previous year (2018). This must be added to the income tax charge for the current year.
• This means we must add the under provision to the estimated tax liability for 2019 and treat as income tax expense for 2019. Thus, GH¢102,000 (GH¢17,500+ GH¢84,500) to be recorded as income tax expense for 2019.
• The estimated tax liability of GH¢84,500 must be reported as current liability in the statement of financial position.

*Identification of debit balance of GH¢17,500 as under provision for 2018 – 1 mark
*Income tax expense GH¢102,000- – 1 mark
*Current liability of GH84,500 – 1 mark

• An amount of GH¢4 million was overprovided for in the previous year.
• Hence the provision for the current year should be reduced by that amount. Hence an expected liability of GH¢24.5 million requires a provision of GH¢20.5 million.
• The liability is still GH¢24.5 million as this is the amount expected to be paid.
• Basically, the provision moves from the existing figure of GH¢4 million credit to the required level of GH¢24.5 million credit.
  

Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either:

• Taxable temporary differences which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
• Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
  

Deferred tax is the estimated future tax consequences of transactions and events that have been recognized in the financial statements of the current and previous periods. Deferred tax arises due to the temporary differences between the accounting profit and the taxable profit. The temporary differences cause the carrying value of some items in the statement of financial position to be different from their tax base (the amount recognized for tax calculation).

Kobby Ltd’s statement of comprehensive income shows an increase in deferred tax, this suggests that temporary differences in the year to 31/3/2015. The main reason was probably an increase in non-current assets causing the tax depreciation to increase more than the accounting depreciation for the year to 31/3/2015, thus causing the increase of GH¢200,000 in deferred tax provision.

Current tax is the estimated amount of corporate income tax payable on the taxable profits of the entity for the period. The amount of current tax is accrued in the financial statements and carried forward as a current liability to the next accounting period when it will be paid. When the tax is paid there will usually be a difference between the amount paid and the amount accrued. If the amount paid is less than the amount accrued there will be an over provision of income tax. The amount over provided will be an adjustment to the income tax expense in the following period. In Kobby Ltd, the current tax estimate for year to 31 March 2014 was GH¢650,000, the statement of cash flows shows that GH¢600,000 was paid in the following period leaving a balance of GH¢50,000 over provided.