Question

PART A                                                                                                           

Required: Advise Katie as to:

a) the deductibility of the $20,000; and

b) whether the $1,200 and $1,000 are deductible as specific deductions.

Where appropriate, support your answer with legislative and judicial authority.

Katie owns a retail store (as a sole trader) that repairs smartphones and laptops. To save costs, Katie often uses substandard equipment to repair such items. One of her employees, being tired of such unethical behaviour, quits and threatens to go to the newspapers about Katie’s practices, which would substantially damage the reputation of Katie’s store.

To persuade the ex-employee not to go to the newspaper, Katie gives him $20,000. Katie’s accountant is unsure if this amount is capital or not.

Katie’s also borrows $100,000 to fund an expansion of her shop. This was for a 10 year loan with borrowing costs of $1,200.

During the year, Katie also lent $1,000 to an established customer (they did not owe the shop any money for the shop’s services). Unfortunately, this money has not been repaid and has been written off.

Answer 1

A.)

1) In this case , katie has used the substandard equipment to repair customer smart phones and laptops as this is an illegal one so one of her employee want to report it to the newspaper , thereby to stop reporting to the newspaper by the employee , katie has given 20000$  

2.) In this case the $20000 deduction should not be taken by katie because this amount not be capitalized as this was used for business purpose there by violating the provisions

B.)

1.) Here katie has taken loan for the expansion of business so that interest amount can be taken as the deduction in terms of income tax

2.) As per the accounting standard 16 borrowing costs , we should deduct some portion of the amount of interest every year and be charged to profit and loss account .

So , as per the provisions ,

We need to amortize $ 1200 every year upto 10 years and this can be taken as specific deduction.

In the second case , katie owes $1000 to the established customer though he did not owe katie any money relating to the repairs

Here $ 1000 will be treated as bad debts and even this amount is also written off so this should not be treated as specific deduction .