Question 1: Topic 1 – Accounting for Company tax
Jamie Ltd’s profit before tax for the year ended 30 June 2020 was $172,400. Included in this profit are the following items of income and expense:
| Amortisation of development costs | $12,000 |
| Carrying amount of equipment sold | 11,000 |
| Depreciation – building (6%) | 15,000 |
| Depreciation – equipment (15%) | 15,000 |
| Depreciation – motor vehicle (20%) | 5,800 |
| Doubtful debts expense | 1,700 |
| Employee benefits expense | 7,000 |
| Entertainment expense | 3,500 |
| Fines and penalties | 4,400 |
| Goodwill impairment | 2,000 |
| Insurance expense | 1,400 |
| Interest revenue | 800 |
| Proceeds on sale of equipment | 19,000 |
| Rent revenue | 15,000 |
| Royalty revenue (exempt income) | 3,000 |
| Warranty expense | 7,000 |
At 30 June, the company’s draft statements of financial position showed the following balances:
| 2020 | 2019 | |
| Assets | ||
| Cash | $14,300 | $10,200 |
| Accounts receivable | 18,000 | 22,000 |
| Allowance for doubtful debts | (2,000) | (3,500) |
| Inventories | 33,000 | 43,500 |
| Interest receivable | 800 | 1,200 |
| Prepaid Insurance | 4,000 | 4,200 |
| Rent receivable | 3,900 | 3,700 |
| Development costs | 48,000 | – |
| Accumulated amortisation | (12,000) | – |
| Motor vehicle | 29,000 | 29,000 |
| Accumulated depreciation | (23,200) | (17,400) |
| Equipment | 100,000 | 120,000 |
| Accumulated depreciation | (60,000) | (54,000) |
| Buildings | 250,000 | 250,000 |
| Accumulated depreciation | (90,000) | (75,000) |
| Deferred tax asset | ? | 24,060 |
| Goodwill | 12,000 | 12,000 |
| Goodwill – accumulated impairment losses | (5,000) | (3,000) |
| Liabilities | ||
| Accounts payable | 27,000 | 24,500 |
| Current tax liability | ? | 7,600 |
| Provision for employee benefits | 12,500 | 8,000 |
| Provision for warranties | 8,700 | 4,200 |
| Mortgage loan | 160,000 | 150,000 |
| Deferred tax liability | ? | 4,275 |
Additional information:
- A tax deduction for development costs on 125% of the amount spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period.
- A tax deduction of $10,000 (10%) can be claimed on equipment.
- The motor vehicle is depreciated at 25% for tax purposes.
- The equipment sold on 1 July 2019 cost $20,000 when it was purchased 3 years before the date of sale.
- Deductions are only available for annual leave when amounts are paid and not as they are accrued.
- Actual amounts paid for insurance are allowed as a tax deduction.
- No deduction is allowed for taxation purposes in relation to entertainment, fines, and penalties.
- Rent revenue and interest are taxable when amounts are received.
- Depreciation of buildings is not allowed as a tax deduction.
- The deferred tax asset (DTA) balance at 30 June 2019 comprised:
a) DTAs relating to temporary differences: $10,110
b) DTAs relating to carried forward tax losses: $13,950 - No journal entries related to deferred tax have been recorded for the year ended 2020. Assume the tax balances at 30 June 2019 are correct.
- The tax rate is 30%.
Required:
- Prepare the current tax worksheet to calculate the current tax liability for the year ended 30 June 2020 (show all working).
- Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2020.
Include all accounts and net balances where appropriate. - Prepare the journal entries to recognise the current tax liability, deferred tax assets, and liabilities at 30 June 2020.
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