Daaho Ltd (Daaho) manufactures and distributes security equipment. Daaho prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 August each year.
On 31 August 2019, the taxation liability account in the books of Daaho Ltd showed a debit balance of GH¢17,500 after paying the 2018 liability. The estimated liability for 2019 is GH¢84,500 and no entry has yet been made to record this.
Required:
Explain the appropriate accounting treatment of the above transaction for the year end 31 August 2019. (3 marks)
View Solution
- 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