The following information is available in relation to the tax figures to be included in the financial statements of Godshill plc.


Tax payable 271,500 (31 December 20X7) 237,600 (31 December 20X6)

Income statement tax expense 269,700 (31 December 20X7) 219,800 (31 December 20X6)


What is the total tax paid during the year ended 31 december 20X7?

The answer is 235,800.


Can someone explain the logics behing this to me please ?

2/13/2010 7:37:42 PM

Which ACC class is this for? Without going into assumptions of initial entries and accrued/deferred adjusting entries...

In 2007 you expensed 269,700 in income tax (presumably). That figure includes both cash paid for tax as well as any tax that you elect to defer into a payable. Therefore 269,700=tax paid in 2007 + tax payable in 2007. The starting figure for tax payable was 237,600 and the ending figure was 271,500. The difference in those two numbers is the tax that was converted into a payable account in 2007.

Therefore, 271,500-237,600= 33,900 = 2007 tax payable

So...

2007 tax expense= tax paid in 2007 + tax payable 2007

269,700=tax paid in 2007 + 33,900

269,700-33,900= 235,800 = total tax paid during the year ended 31 december 20x7.

p.s. I hate it when books do the x in a date

2/13/2010 8:30:19 PM

in case any other accounting students have the same question I'll post my thoughts from a pm:

Like you said, they have to prepare their financial statements before HMRC lets them calculate their exact tax. A company does not want to go about making budgets/spending their cash without knowing what kind of liabilities they might incur in the near future. This is why they have to accommodate for taxes that will accrue. Throughout the entire year the company is incurring income tax as it receives income. So each month it makes an adjusting entry like

Tax Expense xxx
Tax Payable xxx

When a company decides to pay off some tax liability they use the following entry:

Tax Payable xxx
Cash xxx

In this problem you know that the ending balance in Tax Payable is 271,500. That means that 271,500 was left in tax payable after the adjusting entries to cash. So all tax accrued in that year is debited to tax expense and credited to tax payable. So:

Tax Expense 269,700
Tax Payable 269,700

At this point you owe 269,700 in tax for 2007. This does not include the preexisting balance from 2006.

So now you have to take into account all the cash that is paid out for tax in 2007. Again, the entry for this is:

Tax Payable xxx
Cash xxx

You do not know how much is paid out to cash in this problem. You do, however, know how much is left in tax payable at the end of the year. Since the 269,700 credit to tax payable does not include 2006 tax, you should subtract the ending balanace of 2007 tax payable from 2006 tax payable to figure out how much tax payable is left in the account that was accrued in 2007. In this problem this = 33,900. So in other words after taking into account all the tax paid in cash in 2007, your tax payble for 2007 is only 33,900. So...

The whole year you accrued:

Tax Expense 269,700
Tax Payable 269,700

at the end of the year after debiting tax payable and crediting cash, you only have Tax Payable of 33,900. So... 269,700-33,900 = 235,800. So 235,800 came out of tax payable and out of cash. The entries for 2007 would be:

Tax Expense 269,700
Tax Payable 269,700

Tax Payable 235,800
Cash 235,800

Or if you combine them:

Tax Expense 269,700
Tax Payable 33,900
Cash 235,800


As far as why use Dec 31st instead of Jan 1st. I believe it has to do with closing entries. All expense accounts eventually get closed into an income summary account which adds revenues and subtracts expenses from retained earnings.

2/13/2010 9:49:17 PM