Question

Hamish Ltd needs your assistance in calculating and disclosing the taxation expense for the financial year ended 30 June 2018. Hamish Ltd has supplied you with an extract from their income statement and from their balance sheet as well as a list of other information that need to be considered.

Hamish Ltd
Income statement for the year ended 30 June 2018	$
Income	904,000
Revenue from Sales	850,000
Interest Revenue	18,000
Rent Revenue	36,000
Expenses	647,000
Administration and selling expenses	133,000
Wages and salary expenses	250,000
Doubtful debts expense	20,000
Goodwill impairment	20,000
Insurance expense	54,000
Depreciation expense - plant	90,000
Long-service leave expenses	35,000
Warrantee expenses	45,000
Net Profit before tax	257,000

Hamish Ltd
Extract from the Balance sheet as at 30 June 2018	$
Assets
Cash	40,000
Inventory	90,000
Accounts receivable (net)	80,000
Prepaid insurance	?
Interest receivable	6,000
Goodwill	?
Plant	?
Liabilities
Accounts payable	50,000
Wages and salaries owing	30,000
Provision for long-service leave expenses	25,000
Rent revenue received in advance	?
Provision for warrantee expenses	30,000
Loan payable	200,000

The following information relates to the year ended 30 June 2018. Revenue from sales, including those on credit terms, is taxable when the sales are made. Administration and salary expenses are tax deductible when they are incurred. This also applies to wages and salary expenses. The following items that are included in the financial statements of Hamish Ltd are treated differently for accounting and tax purposes:

At year end, accounts receivable owed to Hamish Ltd was $80,000 net after the allowance for doubtful debts. Since Hamish Ltd expects that some of its debtors may be doubtful, it creates an allowance for doubtful debts. The opening balance (on 1 July 2017) of the allowance for doubtful debts was $5,000. The doubtful debts expense is not tax deductible until the debtor is actually written off as bad.

The insurance expense amounts to $4,500 per month. During the year $60,000 was actually paid for insurance and on 30 June 2017 $13,500 was prepaid for the 2017 financial year. Insurance expense is tax deductible when it is paid.

Interest amounting to $12,000 was received during the year and an additional $6,000 was accrued to account for the total interest earned of $18,000 for the year. Interest is taxable when it is received.

The plant was acquired on 1 July 2016 at a cost of $500,000. The plant has an economic life of 5 years with a residual value of $50,000. The straight line method of depreciation is used to depreciate the plant for accounting purposes. For taxation purposes, the straight line method over 4 years is used to calculate the depreciation, but only the cost of the plant is depreciable (ignore the residual for tax purposes).

Hamish Ltd paid an amount of $10,000 during the year in respect of long service leave. In addition an amount of $25,000 had been accrued for accounting purposes during the year in respect of long service leave. Tax deductions for this item are available only when the amount is paid. At 30 June 2017 there was no accrual for long service leave.

During the year $45,000 was received with respect to rent revenue, of which $36,000 relates to the current year. This is the first year that Hamish Ltd received any rent. Rent received is taxable when it is received.

Warrantee expenses incurred amount to $45,000, of which $15,000 has been paid by year end. Warrantee expenses are only tax deductible if they have been paid. At 30 June 2017 there was no accrual for warrantee expenses.

During the year the goodwill with an opening balance of $100,000 was impaired by $20,000. Goodwill impairment is not a deductible expense for tax purposes.

At the beginning of the year (i.e., at the 1st of July 2017), total taxable temporary differences amounted to $48,500 and total deductible temporary differences amounted to $5,000.

The tax rate was always 33% but changed to 28% during the current year.

Required:

Calculate the deferred taxation that Hamish Ltd should provide for the year ended 30 June 2018. Complete the worksheet for this purpose. Prepare the journal entries (with narrations) to account for Hamish Ltd’s tax expense for the year ended 30 June 2018 in accordance with NZ IAS 12.

Calculate the taxable income and current tax for Hamish Ltd for the year ended 30 June 2018. Provide the journal entries that will be needed to account for current tax for the 2018 financial year.

Show an extract from the income statement and the notes to the income statement of Hamish Ltd that clearly shows the required disclosure of the tax expense for the year ended 30 June 2018 in accordance with NZ IAS 12. (9

Hamish Ltd has a deferred tax asset as well as a deferred tax liability at 30 June 2018 in accordance to your calculation that would be disclosed in accordance with NZ IAS 12. The financial director is concerned with this situation as he argues that the IRD does not owe them anything and neither does Hamish owe anything to the IRD, other than the current tax payable. So why should amounts that are not currently an asset or liability be disclosed as such? Give a well-reasoned answer to the financial director.

Answer 1

BALANCE SHEET OF HAMISH LTD AS ON 30TH JUNE 2018

ASSET	$
CASH INVENTORY ACCOUNT RECEIVABLE PREPAID INSURANCE INTEREST RECEIVABLE GOODWILL PLANT	40000 90000 80000 19500 6000 80000 320000
LIABILITY	$
ACCOUNT PAYABLE WAGES AND SALARIES OWING PROVISION FOR LONG SERVICE LEAVE EXPENSE RENT REVENUE RECEIVED IN ADVANCE PROVISION FOR WARRENTY EXPENSES LOAN PAYABLE	50000 30000 25000 9000 30000 200000

CALCULATION

PREPAID INSURANCE-

INSURANCE EXPENSEX PAID 60000

ADD PREPAID OF PREVIOUS YEAR 13500

LESS INSURANCE EXPENSE 45000

PREPAID FOR THE YEAR 19500

GOODWILL-

OPENING BALANCE 100000

LESS IMPAIRMENT 20000

BALANCE 80000

PLANT-

PURCHASED AT 500000

LESS DEPRECIATION FOR 2 YEAR [90000*2] 180000

BALANCE 320000

RENT REVENUE RECEIVED IN ADVANCE-

RENT RECEIVED 45000

RENT REVENUE FOR THE YEAR 36000

BALANCE 9000

TAXABLE INCOME

REVENUE FROM SALES 850000

INTEREST REVENUE 12000

RENT REVENUE 45000

TOTAL REVENUE 907000

EXPENSES-

SELLING AND ADMINISTRATIVE 133000

WAGES AND SALARIES 250000

DOUBTFUL DEBT EXPENSES 5000

GOODWILL IMPAIRMENT -

INSURANCE EXPENSE 60000

DEPRECIATION 125000

LONG SERVICE LEAVE EXPENSE 10000

WARRENTY EXPENSE 15000

TOTAL EXPENSES 598000

TAXABLE INCOME 309000