QUESTION (25 marks)

You are the Financial Accountant at Blue Sky Ltd. The company started operating on 1 April 2021 and has a financial year-end of 31 March. You are in the process of creating a template to calculate the company’s deferred tax balance and movement that can be used in future years. The following information is available:

• Land was purchased for R2 500 000 on 1 April 2021. The land is not depreciated.

• A building, constructed at a total cost of R980 000, was available for use on 1 July 2023, and was brought into use on 1 September 2023. The building is depreciated to an estimated nil residual value over eight years on the straight-line method.
• Plant costing R1 200 000 was purchased on 1 June 2022. It was installed and available for use on 1 September 2022. The costs of installation amounted to R320 000. Depreciation is provided over a period of ten years to an estimated residual value of R100 000, using the straight-line method.
• Research costs of R620 000 were incurred during 2024 and research costs of R410 000 were incurred during 2023. No research costs were incurred during 2022.

• Income received in advance at 31 March 2024 was R775 000 (31 March 2023: R350 000 and 31 March 2022: R1 150 000).
• An assessed tax loss of R1 300 000 was incurred during the tax year ended 31 March 2022.

• A taxable profit of R1 136 333, before taking into account any tax loss brought forward, was realised during the tax year ended 31 March 2023.
• A taxable profit of R1 542 375, before taking into account any tax loss brought forward, was realised during the tax year ended 31 March 2024.
• It was considered probable, at the end of every year since incorporation, that sufficient future profits would be available to fully utilise the deferred tax assets.

Additional information:

• A deduction for tax purposes equal to 20% of the cost (purchase price plus installation costs) of the plant per annum is allowed, not apportioned for a part year.
• No deductions are allowed relating to the cost of the land or building.

• A tax deduction is allowed for research costs incurred over 4 years on the straight line method, not apportioned for a part year.
• Income is taxed at the earlier of receipt or accrual.

• South African Revenue Services (SARS) allows tax losses to be carried forward and set off against taxable profits in future years.
• An income tax rate of 27% is applied during the 2024 financial year end (2023: 28%).

REQUIRED:

Using the balance sheet approach, calculate the deferred tax for each category of temporary difference at 31 March 2023 and 31 March 2024 in the accounting records of Blue Sky Ltd.
• Make use of Excel and create your own template to prepare your calculations.

• Indicate clearly whether the balance represents an asset or liability.

• Ensure you include all elements and their applicable values as part of your deferred tax calculations.
• Clearly indicate items on which no deferred tax is calculated and mention why.

Marks will be awarded as follows:

• Deferred tax calculations (22 marks)

• Presentation and communication (3 marks)

Answers to Above Questions on  Financial Accounting

Answer 1: The deferred tax for each category of temporary difference at 31 March 2023 and 31 March 2024 in the accounting records of Blue Sky Ltd using balance sheet approach is calculated as follows:

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