Question34 The following information relates to Zeplin Ltd for the year ended 30 June 2025: [table]
Interest payable at 1 July 2024 | 90 000 Interest payable at 30 June 2025 | 130 000 Interest expense | 150 000
[/table] The income tax rate is 30%. The journal entry to record the movement in deferred tax for the above information is: DR Income tax expense $12 000 / CR Deferred tax liability $12 000. DR Deferred tax liability $12 000 / CR Income tax expense $12 000. DR Deferred tax asset $27 000 / CR Income tax expense $27 000. DR Deferred tax asset $12 000 / CR Income tax expense $12 000. DR Income tax expense $12 000 / CR Deferred tax asset $12 000. ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The task provides Zeplin Ltd’s year-end information and asks us to determine the journal entry to record the movement in deferred tax, given a 30% tax rate. We will assess each option in turn to see whether the described entry aligns with typical deferred tax accounting.
Option 1: 'DR Income tax expense $12 000 / CR Deferred tax liability $12 000.' A debit to income tax expense increases expense, and a credit to the deferred tax liability increases the liability. This would imply recognizing a deferred tax liability of $12,000. However, the information given (changes in interest payable) more naturally supports a temporary difference that affects the deferred tax asset rather than a liability, unless there is evidence of a taxable temporary difference that increases tax payable in the future. Without such a context, this entry seems unlikely as the sole movement for a small amount like $12,000, and it misaligns with typical movement where a deferred tax asset is increased when a deductible temporary difference arises.
Option 2: 'DR Deferred tax liability $12 000 / CR Income tax expense $12 000.' Here we debited the deferred tax liability and credited income tax expense. Debiting a liability reduces it, which would be appropriate only if the temporary difference decreased the liability. But the information given does not indicate a reversal or reduction of a previously recognised liability; rather, we are told to move in deferred tax, and a $12,000 amount paired with a 30% rate would typically reflect a deductible temporary difference leading to a deferred tax asset, not a liability. Thus this option fails to reflect the correct nature of the adjustment.
Option 3: 'DR Deferred tax asset $27 000 / CR Income tax expense $27 000.' Debiting a deferred tax asset corresponds to recognizing or increasing a future tax benefit. The amount $27,000 would correspond to a 30% effective rate on a deductible temporary difference of $90,000, but the data provided shows balances that do not clearly yield $27,000 as the movement; more importantly, the number does not align with the given figures in a straightforward manner. Hence, this entry overstates the impact and is inconsistent with the simple 12,000 figure shown in other options.
Option 4: 'DR Deferred tax asset $12 000 / CR Income tax expense $12 000.' This entry increases a deferred tax asset by debiting it and reduces income tax expense by crediting it, effectively recognizing a deductible temporary difference that yields a tax benefit of $12,000. The amount matches the lower figure presented in the options and is consistent with a scenario where the movement in deferred tax is a deductible temporary difference arising from timing differences related to interest payable, calculated at 30%. This option seems coherent with standard treatment when a deductible timing difference increases the asset. 
Option 5: 'DR Income tax expense $12 000 / CR Deferred tax asset $12 000.' Debiting income tax expense and crediting a deferred tax asset would reduce tax expense in the current period, while increasing the asset, which is another way to present the same effect as option 4 but with reversed signs. However, the conventional presentation for recognizing a deductible temporary difference that increases a deferred tax asset is to debit the deferred tax asset and credit income tax expense, not the other way around. Thus this option is inconsistent with standard practice.
Overall, option 4 aligns with the standard approach: recognizing a deductible temporary difference that increases the deferred tax asset, thereby reducing current income tax expense by the amount of the deductible difference. The other options either suggest a deferred tax liability, misstate the direction of movement, or present the effect with inconsistent sign conventions, which would not correctly reflect a deductible timing difference under a 30% tax rate.

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