Page 127 - Finac1 Test 1 slides

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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