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 Amount ($) Remarks 25,50,000 3000 165000 510000 76000 48000 Particulars Gross Profit Less: Expenses Miscellanous expenses Rent Wages and Salaries Selling exp Finance exp Doubtful debts Long service leave Warranty expenses Depreciation expense - plant Insurance Motor vehical exp. Accounting and audit fees Total Expenses Taxable Profit 98000 28000 500000 56000 37000 17000 No bad debts have been written off long service leave ex. has been paid To the extent actually paid Depreciated over 4 years for tax purpose count only for this year insurance 1538000 1012000 Deductible Temporary Differences Particulars Accounting Base Amount ($) ($) Tax Base Amount Deductible Temporary Difference ($) 98000 56000 Provision for Long Service Award 154000 114000 28000 86000 13000 13000 Warranty expenses doubtful debts Total Deductible Temporary Differences 155000 3 Taxable Temporary Differences Accounting Base Amount Tax Base Amount Taxable Temporary Difference Particulars ($) ($) 1600000 1500000 100000 Plant less Depreciation Total Taxable Temporary Differences 100000 4 Current Tax Liability Taxable Profit Tax Rate Current Tax Liability (S) 1600000 30.00% 480000 5 Income Tax Expense Accounting Profit Tax Rate Current Tax Liability ($) Working 1500000 30.00% 450000 155000 Deductible Temporary Differences Taxable Temporary Differences Net Deductible Deferred Tax Asset @ 30% 100000 55000 16500 credit Particular Current Tax Expense A/c dr Deferred Tax Asset A/c dr To Current Tax Liability A/c To Deferred Tax Expense A/C debit 480000 16500 480000 16500