Question

Ltd commences operations on 1 July 2016. One year after the commencement of its operations (30 June 2017) the entity presents its first Statement of Comprehensive Income and Statement of Financial Position on 30 June 2017. The statements are prepared before considering taxation. The following extracts are available. Happy Ltd Statement of Comprehensive Income for the year ended 30 June 2017 $ $ Gross Profit 2,550,000 Expenses: Miscellanous expenses 3,000 Rent 165,000 Wages and Salaries 510,000 Selling Expenses 76,000 Finance Expenses 48,000 Doubtful debts 13,000 Long service leave 154,000 Warranty expenses 114,000 Depreciation – Plant & Equipment 400,000 Insurance Expenses 56,000 Motor Vehicle Expenses 37,000 Accounting and Audit Fees 17,000 1,593,000 Accounting profit for the year $ 957,000 Happy Assets and Liabilities as disclosed in the Statement of Financial Position for the year ended 30 June 2017 $ $ Assets Cash and cash equivalents 176,000 Inventory 345,000 Receivables (net) 510,000 Prepaid insurance 23,000 Plant and Equipment – cost 2,000,000 Less accumulated depreciation 400,000 1,600,000 Land 1,200,000 Total assets 3,854,000 Liabilities Payables 324,000 Provision for warranty expenses 86,000 Loan payable 830,000 Mortgage 450,000 Provision for long service leave 56,000 Total liabilities 1,746,000 Net assets 2,108,000 Other information:  Amounts received from sales, including those on credit terms, are taxed at the time of the sale is made.  No bad debts have been written off during the financial year. Deductions for tax purposes are only available when the bad debts have been written.  The plant and equipment is depreciated over 5 years for accounting purposes, but over 4 years for taxation purposes.  Warranty expenses were accrued and, at the year-end, actual payments of $28,000 had been made (leaving of accrued balance of $86,000). Deductions for tax purposes are only available when the amounts are paid and not as they accrued.  The amount of $98,000 long service leave expense has been paid.  Insurance was initially prepaid to the amount of $79,000. At the year-end, the unused component of the prepaid insurance amounted to $23,000. Actual amounts paid are allowed as a tax deduction.  All other expenses incurred have been paid as at year-end.  Happy Ltd has some land which cost $800,000 and which has been revalued to its fair value of $1,200,000.  The tax rate is 30 per cent. Required: a) Compute the taxable income or loss (using excel spreadsheet). [5 marks] b) Complete the Taxation Worksheet on the next page in accordance with AASB 112 Income Taxes (using excel spreadsheet). [9 marks] c) Prepare the applicable journal entries at 30 June 2017 to account for tax using the balance sheet method. [6 marks] Part B [10 Marks] One year later (30 June 2018) an independent valuer assessed the fair value of the land to be $700 000 and the plant and equipment to be $1 644 000. Required a) Prepare any necessary entries to revalue the land and the plant and equipment as at 30 June 2018. [7 marks] b) Assume that the plant has a remaining useful life of 4 years with zero residual value. Prepare entries to record the depreciation expense for the year ended 30 June 2019 using the straight-line method

Answer 1

1	Taxable Income
	Particulars		Amount ($)	Remarks
	Gross Profit		25,50,000
	Less: Expenses
	Miscellanous expenses	3000
	Rent	165000
	Wages and Salaries	510000
	Selling exp	76000
	Finance exp	48000
	Doubtful debts	-		No bad debts have been written off
	Long service leave	98000		long service leave ex. has been paid
	Warranty expenses	28000		To the extent actually paid
	Depreciation expense - plant	500000		Depreciated over 4 years for tax purpose
	Insurance	56000		count only for this year insurance
	Motor vehical exp.	37000
	Accounting and audit fees	17000
	Total Expenses		1538000
	Taxable Profit		1012000

2	Deductible Temporary Differences
	Particulars	Accounting Base Amount ($)	Tax Base Amount ($)	Deductible Temporary Difference ($)
	Provision for Long Service Award	154000	98000	56000
	Warranty expenses	114000	28000	86000
	doubtful debts	13000	-	13000
	Total Deductible Temporary Differences			155000

3	Taxable Temporary Differences
	Particulars	Accounting Base Amount ($)	Tax Base Amount ($)	Taxable Temporary Difference ($)
	Plant less Depreciation	1600000	1500000	100000
	Prepaid insurance	79000	56000	23000
	land	1200000	800000	400000
	Total Taxable Temporary Differences	2879000	2356000	523000

4	Current Tax Liability
	Taxable Profit	2879000
	Tax Rate	30.00%
	Current Tax Liability ($)	863700

5	Income Tax Expense
	Accounting Profit	2356000
	Tax Rate	30.00%
	Current Tax Liability ($)	706800

Taxation Worksheet

item	carriang amount	Tax base	deductable temporery diffrence	taxable temporery diffrences	Tax expenses	Revalution surplus	Tax payable
Cash	176000	176000
inventory	345000	345000
receivable (net)	510000	523000	13000		(13000)
Prepaid insurance	23000			23000	23000
Plant and equipment net	1600000	1500000		100000	100000
land	1200000	800000		400000		400000
Liabilities
Accounts payable	324000	324000
Provision for warrenty	86000	-	86000		(86000)
Loan payable	830000	830000
Mortgage	450000	450000
Provision for long service leave	56000		56000		(56000)
Net Assets	2108000	1740000
Temporary difference for year			155000	523000	(32000)	400000
Loss carried forward
Movement for the period			155000	523000	(32000)	400000
Tax effected at 30%			46500	156900	(9600)	120000
Tax on taxable income					303600		303600
Income tax adjustment			46500	156900	294000	120000	303600

Income tax expense dr. - 294000

Deferred tax assets dr. 46500

Revaluation surplus dr 120000

Cr: Deferred tax liability 156900

Cr: Income tax payable 303600

Deferred tax liability dr. 46500

Cr: Deferred tax assets 46500