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INCOME TAXES

Provisions - example

A company has been incorporated in the current year, and it sells

vacuum cleaners with a one-year warranty. The company provides

for the warranty costs and the total of the provision account at the

end of the year is R150 000. Assume that the profit before tax is

R500 000 for the year ended 31 December 20.12 and the tax rate is

28%. The SA Revenue Service will allow the warranty costs as a

deduction once they are actually incurred. The directors of the

company are certain that the amount provided is not excessive.

Deferred tax is provided on all temporary differences using the

statement of financial position approach. There is assurance

beyond reasonable doubt that there will be sufficient taxable profit

in the future to realise any tax benefits.

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