ACCT702 – Cu
ent Issues in Financial Accounting
Homework Assignment 2: Accounting for Income Taxation
(TOTAL: 40 MARKS)
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 XXXXXXXXXX,000
Revenue from Sales XXXXXXXXXX,000
Interest Revenue 18,000
Rent Revenue XXXXXXXXXX,000
Expenses XXXXXXXXXX,000
Administration and selling expenses 133,000
Wages and salary expenses XXXXXXXXXX,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
Wa
antee 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 wa
antee 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 incu
ed. 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
cu
ent year. This is the first year that Hamish Ltd received any rent. Rent received is taxable when it
is received.
Wa
antee expenses incu
ed amount to $45,000, of which $15,000 has been paid by year end.
Wa
antee expenses are only tax deductible if they have been paid. At 30 June 2017 there was no
accrual for wa
antee 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 cu
ent year.
Required:
a) Calculate the defe
ed taxation that Hamish Ltd should provide for the year ended 30 June 2018.
Complete the worksheet for this purpose. Prepare the journal entries (with na
ations) to account for
Hamish Ltd’s tax expense for the year ended 30 June 2018 in accordance with NZ IAS 12.
(18 marks)
) Calculate the taxable income and cu
ent tax for Hamish Ltd for the year ended 30 June 2018. Provide
the journal entries that will be needed to account for cu
ent tax for the 2018 financial year.
(8 marks)
c) 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 1 XXXXXXXXXX9 marks)
d) Hamish Ltd has a defe
ed tax asset as well as a defe
ed 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 cu
ent tax payable. So why should amounts that are
not cu
ently an asset or liability be disclosed as such? Give a well-reasoned answer to the financial
director XXXXXXXXXX5 marks)
Worksheet
Hamish Ltd - Worksheet to determine temporary differences and defe
ed tax as at 30 June 2018
Ca
ying Tax base Deductible Taxable
amounts TDs TDs
Assets
Cash
Inventory
Accounts receivable (net)
Prepaid insurance
Interest receivable
Goodwill
Plant (net)
Total Assets
Liabilities
Accounts payable
Wages and salaries owing
Provision for long-service leave expenses
Rent revenue received in advance
Provision for wa
antee expenses
Loan payable
Total liabilities
Net Assets
Total Temporary Differences before exempt differences
Exempt differences
Total Temporary Differences
Tax effect at 28% (i.e., closing balances)
Less opening balances
Adjustment to be made by journal entry