Chapter 11
Q. 11.2
A company uses the declining balance depreciation for the equipment used, according to its accounting principles. The old tax law allowed the company to deduct the depreciation computed based on this method. Starting with the beginning of the year, the tax law is amended and only the straight-line method is allowed for tax purposes. The remaining value of the assets is depreciated for tax purposes on the remaining period.
At the end of the previous year, the remaining values of assets are presented in Table 11.5. A new asset is bought on January 1st, for 100,000 lei. The company depreciates its assets by 30% per year, for reporting purposes, computed on the remaining value. The revenues recognised for the year are 800,000 lei. The tax rate we’ll use is 16%.
Table 11.5 Example 2
|
1 |
Value 2 |
Period (years) 3 |
Tax depreciation forthe year 4 = 2/3 |
Accounting depreciation for the year 5 = 2 * 30% |
| Existing assets | 600,000 | 6 | 100,000 | 180,000 |
| New asset | 100,000 | 10 | 10,000 | 30,000 |
| Total | 700,000 | 110,000 | 210,000 |
Step-by-Step
Verified Solution
The company recognises revenues of 800,000 lei and expenses of 210,000 lei for accounting purposes.
The accounting profit = 800,000 − 210,000 = 590,000
For tax purposes, the tax depreciation should be deducted from the revenue
The taxable profit = 800,000 − 110,000 = 990,000
Profit tax expense = 990,000 * 16% = 158,400 lei. This expense will be recorded as a profit tax expense in the company’s accounting records. With very limited examples, materiality is not a principle recognised for tax purposes. In other words, one could not escape the obligation to file tax forms on the grounds that their payable value is insignificant.
For tax purposes, both expenses and revenues are those registered as per the accounting journals, however some adjustments are made to the accounting profit as we can see below:
The easiest example to illustrate refers to charity expenses (donations).
An entity is not prohibited from charity, however, for tax purposes, the expense is fully disallowed. When an entity computes the taxable profit, this will be different than the accounting profit.
