ACF2100 Lecture Notes - Lecture 2: Income Tax, Deferred Tax, Satb
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Lee Limited has the followinginformation for the year ending 31 March 2013:
Current tax payable is $39,950 during the year.
Profit before tax is $150,000 during the year. This amountincludes an interest income of $5,000 from Government Bonds. Theinterest income is never taxable for tax purposes.
As at 31 March 2013, total deferred tax assets were $3,250 andtotal deferred tax liabilities were $9,500 (i.e., closingbalances).
As at 31 March 2012, total deductible temporary differences were$8,000 and total taxable temporary differences were $28,000.
All the changes in deferred tax assets and deferred taxliabilities are related to tax expenses.
The tax rate changed from 30% to 28% at the beginning of thecurrent financial year (1 April 2012).
REQUIRED:
In accordance with NZ IAS 12, calculate Lee Limitedâs deferredtax assets and liabilities by completing the attached excelworksheet (WORKSHEET 2), and provide the journal entries to accountfor its current tax and deferred tax.
(5 marks)
Prepare the income statement extract to show how to disclose thetax expense for the year ending 31 March 2013 for Lee Limited.
(2 marks)
Prepare a numerical reconciliation between Lee Limitedâsreported tax expense and its expected tax expense (i.e., theproduct of accounting profit before tax multiplied by theapplicable tax rate).
Lee Limited, worksheet to calculate deferred tax assetsand deferred tax liabilities | ||
DTA | DTL | |
Closing balances of DTA and DTL | ||
Less: Beginning balances of DTA and DTL (at 30% rate) | ||
Adjust for: Movements during the year related to rate change | ||
Adjust for: Movements during the year related to equity accountif any | ||
Remaining Adjustments to be made in journal entry | ||
Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.
Hamish Ltd | |
Income statement for theyear 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 sellingexpenses | 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 beforetax | 257,000 |
Hamish Ltd | |
Extract from the Balancesheet 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 leaveexpenses | 25,000 |
Rent revenue received inadvance | ? |
Provision for warranteeexpenses | 30,000 |
Loan payable | 200,000 |
The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:
At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.
The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.
Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.
The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).
Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.
During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.
Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.
During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense 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 totaldeductible temporary differences amounted to $5,000.
The tax rate was always 33% but changedto 28% during the current year.
Required:
Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.
Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.
Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9
Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.
| Challenger Limited | |||
| Balance Sheets for the year | |||
| ended at 31 December | |||
| ( U.S dollars) | |||
| 2007 | 2008 | ||
| Assets | |||
| Non-Current Assets | |||
| Property , plan and equipment | $152,425,129.00 | $49,410,844.00 | |
| Total non-currentassets | $152,425,129.00 | $49,410,844.00 | |
| Current assets | |||
| Spare parts inventory | $6,956,849.00 | $12,874,676.00 | |
| Receivables and prepayments | $40,518,272.00 | $18,887,780.00 | |
| Due from related parties | $519,044.00 | $140,136.00 | |
| Cash and Cash equivalents | $2,842,879.00 | $2,753,003.00 | |
| TotalCurent assets | $50,837,044.00 | $34,655,595.00 | |
| Total Assets | $202,262,173.00 | $84,066,439.00 | |
| Equity and liabilities | |||
| Equity | |||
| Capital | $64,957,265.00 | $50,000,000.00 | |
| Additional Paid-in Capital | $70,795,653.00 | $15,000,000.00 | |
| Revaluation reserve | $16,782,544.00 | $1,403,983.00 | |
| Other | -$1,368,122.00 | ||
| R/E | $9,240,432.00 | $2,314,787.00 | |
| Total Equity | $160,407,772.00 | $68,721,770.00 | |
| Liabilities | |||
| Non-Current Liabilities | |||
| Borrowings | $4,545,190.00 | $738,499.00 | |
| Total Non-CurrentLiabilities | $4,545,190.00 | $738,499.00 | |
| Current Liabilities | |||
| Borrowings | $13,554,645.00 | $2,676,000.00 | |
| Trade and other payables | $14,060,820.00 | $7,016,164.00 | |
| Current Tax liabilities | $4,062,411.00 | $2,869,643.00 | |
| Provisions | $491,280.00 | ||
| Divididends and redemption payable | $3,078,302.00 | $2,044,363.00 | |
| Due to related parties | $3,061,753.00 | ||
| Total CurrentLiabilities | $38,309,211.00 | $14,606,170.00 | |
| Total liabilities | $42,854,401.00 | $15,344,669.00 | |
| Total equity and liabilities | $203,262,173.00 | $84,066,439.00 | |
| Challenger Limited | |||
| Statements of Income | |||
| for the year ended | |||
| 31 of december | |||
| ( US dollars) | |||
| 2007 | 2008 | ||
| Drilling revenue | $73,071,917.00 | $46,043,831.00 | |
| Drilling costs | -$52,933,369.00 | -$34,309,267.00 | |
| Gross Profit | $20,138,548.00 | $11,734,564.00 | |
| General and administrative Expenses | -$9,775,827.00 | -$8,021,383.00 | |
| Other income | $2,446,433.00 | $19,005.00 | |
| Other expense | -$1,870,000.00 | ||
| Operating (loss) / Profit fromoperations | $10,939,154.00 | $3,732,186.00 | |
| Finance income | $46,015.00 | $751,224.00 | |
| Finance cost | -$673,397.00 | -$559,662.00 | |
| (Loss) / profit before income tax | $10,311,772.00 | $3,923,748.00 | |
| Income tax | -$3,389,127.00 | -$2,307,594.00 | |
| (Loss)/ profit for the year | $6,922,645.00 | $1,616,154.00 |
Basis of Preparation The financial statements have been preparedin accordance with International Financial Reporting Standards(IFRS). The financial statements have been prepared under thehistorical cost convention as modified by the revaluation of therigs. Rigs include drilling equipment, well control equipment,electrical equipment, power plant, and so on.
Required:
A. Since the financial statements are prepared in U.S. dollars,does this imply that the financial statements are prepared inaccordance with U.S. GAAP? Why or why not?
B. List three major differences between this balance sheet incomparison to balance sheets prepared under U.S. GAAP.
C. Evaluate the performance of the company using the incomestatement. What appears to be the cause of the major change inperformance?
