Lila-Droid is preparing its consolidated financial statements for Year 2.

Included in its accounting profit

of L$ 15,000 for Year 2, Lila-Droid has the following items:
 A deduction of L$ 1,000 for meals and entertainment, of which only 50% is deductible for tax
purposes.
 Depreciation on equipment for accounting purposes of L$ 250, while for tax purposes it is L$ 700.
 An accrual of L$ 300 related to its warranty provision on the D-900. Actual claims paid out during
the year totalled L$ 500, which was recognised against the warranty provision. For tax purposes,
the warranty costs are deductible for tax purposes when the claims are paid.
Additionally, at the end of Year 2, Lila-Droid has assets and liabilities whose carrying amounts differ
from their tax base as follows:

Note Carrying amount

Land 1 L$1,000
Equipment 2 L$ 2,500
Consolidated net assets of investment in Lila-Industrial 3 L$ 2,000
Warranty provision 4 L$ 700

1. During Year 2, Lila-Droid acquired land from the Planet Lila Council. Lila-Droid is not entitled to a
deduction on the cost of land, even upon its disposal.
2. The equipment has a tax written down value of L$ 850 at the end of year 2 due to differences in
depreciation (accounting: straight-line; tax: accelerated declining balance). Lila-Droid intends to
recover the economic benefits of the equipment through use. At the start of Year 2, Lila-Droid
recognised a deferred tax liability of 300 on equipment.
3. During Year 2, Lila-Droid decides to sell a wholly-owned subsidiary, Lila-Industrial, and therefore
classifies it as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations. Previously, no deferred tax was recognised between the carrying
amount and tax base of the investment in Lila-Industrial. Lila-Droid can deduct the original cost of
the investment of L$ 1,500 against the selling price.
4. The balance of the warranty provision discussed above. At the start of Year 2, Lila-Droid
recognised a deferred tax asset of 225 on the warranty provision.

The following tax rates are applicable to Lila-Droid:

Capital gains 15%
Undistributed earnings 25%
Distributed earnings 10%

During Year 2, the Planet Lila Council announced plans to decrease the tax rate for capital gains from
15% to 12.5%. However, the tax rate is enacted only once signed by Mrs. Lila, and it is not yet clear
whether she will sign the tax rate into effect.
Generally, Lila-Droid is highly profitable and current forecasts indicate that profitability will be
maintained for the foreseeable future.

Required
1) Determine the journal entries to record the effect of income taxes in Year 2, and indicate what
would be presented on the face of the statement of financial position.
2) Reconcile the income tax expense for Year 2 to the ‘expected’ tax expense calculated by applying
the applicable tax rate to the profit before tax.