Advance Accounting - Assignment Example

Advance Accounting M--- Assignment 2 Review and comment on the mentee’s work According to the mentee’s work, we don’t think mentee have understood the company income tax adequately. This is because; mentee did not identify the items which should be treated in accounting treatment and taxation. In addition, he did not know exactly how to calculate the tax base in Asset and Liability. Therefore, it follows that the most amounts resulted to in the tax worksheet were wrong. Identify and correction any mistakes First, he did not mention the Company’s name. This simply means that we don’t know which company he was preparing the financial statements for. According toAASB 101 para 51 a, b & c, the name of company, date of reporting and whether it is an individual entity or group entities are necessary details for those financial statements. Second, according to per AASB 121, currency is needed for the present information. Under this case, the currency should be presented in dollars. There are some specific corrections for mistakes; we will discuss them specifically in the following two parts. Provide a detailed explanation to each correction that you have made; Correction- Statement reconciliation XXXX Calculation of Taxable Profit for year ended 30 June 2013 Profit before tax To reverse accounting treatment: Deduct: Interest Revenue Add: Warrantee Expense Depreciation Expense – Vehicle Insurance Annual Leave Expense Depreciation Expense– Machinery Entertainment Expense Impairment loss for goodwill To include taxation treatment: Add: Interest Revenue Deduct: Depreciation Expense – Vehicle Depreciation Expense–Machinery Insurance Annual Leave Expense Warrantee Expense Entertainment expense Impairment loss Taxable profit Current Tax Liability (Tax rate 30%) $15,000 15,000 20,000 12,000 20,000 12,000 10,000 12,000 0 26,000 14,000 13,000 0 0 $820,000 14,000 806,000 104,000 910,000 -- 910,000 65,000 845,000 253,500 Further explanation: Interest Revenue: Mentee has written the correct amount for the Interest Revenue. Interest on this investment is paid annually (31December 2013), the reporting date is 30th June 2013. For accounting purposes, only $14,000 ($28,000/2) should be recognized as revenue as at 30th June 2013. However, for tax purposes only what is paid is an allowable deduction. That means there is no tax deduction on June 30. We need to deduct accounting revenue of $ 14,000 and add back zero. Vehicledepreciation: Under the vehicle operation, Mentee has written the wrong amount for the vehicle under accounting treatment. The correct amount should be $15,000. Vehicle depreciation 4 years s/line no residual value so $60,000/4=$15,000 for accounting. For tax is 20% of $60,000= $12,000 accounting & 20% tax. Vehicle was purchased on 1 July 2011, so it was still being depreciated for both tax and accounting purposes. Machinerydepreciation: Machinery depreciation for 10 years s/line residual value of $10,000 so ($210,000-10,000)/10=$20,000 to be accounted for. For tax is 20% of $210,000=$42,000 accounting & 20% tax. Machinery purchased on 1 July 2007 so it is still being depreciated for accounting purposes but not tax purposes.Therefore, tax depreciation has already depreciated full cost such that there is no further deductions for this period. However, $15,000 of machinery seems wrong. Insurance: Insurance prepaid at the beginning of period was $18,000 at July 1, 2012 and ended at $24,000 on June 30, 2013. Expense is $20,000 so amount paid is: Beginning balance 18,000 - expense 20,000 + Amount paid in cash 26,000 =end balance 24,000 However, the amount of insurance calculated by Mentee is wrong. Warrantee Expense: Beginning balance: $22,000 (Add) Expense: $15,000 Balance: $2,000 (Subtract) Ending balance: $22,000 Cash paid: $13,000 Annual Leave Expense: The annual leave expense is an expense and a liability and needed to be reversed under accounting treatment. Mentee wrote the correct amount. Under the taxation treatment, the annual leave expense should be deducted once the annual leave expenses are paid. The information given is that the annual leave paid in the period $14,000. Thus, it should be deducted under taxation treatment. Entertainment Expense: Mentee did not reverse the entertainment expense under accounting treatment. The $12,000 of entertainment expense should be added back. However, under taxation treatment it is not deductible. Goodwill: The goodwill is recognised as an impairment loss. This would be reversed under the accounting treatment. Mentee did not add goodwill amount under the accounting treatment. However, it would be not be deductible under taxation treatment. Taxable profit: After above adjusting and reversing processes under the accounting treatment, and including the right process under taxation treatment. The actual taxable profit should be $845,000 not $520,000. Current tax liability: According to AASB 112 Para 46, the current tax liabilities should be measured and expected to be paid using tax rates. Thus, the current liability is $253,500 (845,000*30%). However, Mentee did one more step, by working out the income after tax. This step is unnecessary. We only need to know the taxation liability for current period. Journal entry: Dr Income Tax expense 253,500 Cr Current Tax Liability 253,500 (Being Current tax liability at 30% tax rate) Correction –Tax worksheet This worksheet also lack of title as per AASB 101. 1. Tax Base for Assets: The tax base for assets calculation entails the deduction of the future amount that is taxable from the carrying amount, after which the future value is then added to it (AASB 112, Para 7, Locke, 2012). Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount Cash: Mentee presented correct amount. The amount shown in the Statement of Financial Position is $40,000. The calculation is: Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount $55,000 = $55,000 – 0 + 0 There is no diffidence in the tax base and carrying amount, therefore, there is equally no temporary difference. Inventory: The inventory amount that Mentee presented is correct. However, this amount should not be under the deductible temporary differences. Theinventory will be its carrying amount, because of its net realisable value (AASB 102 (para 8)). There is no variation between carrying amount and tax base. Therefore, there is no temporary difference. Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount $110,000 = $110,000 - $110,000 + $110,000 Prepared Insurance: The carrying amount of prepared insurance of $24,000, which Mentee presented, is correct. This amount will be assessable in the future. It is expected to gain $24,000 economic benefit. The consequence is that; considering the fact that the future retrieval of insurance results in the future amount that is taxable, then it will not result in any future deductibles. Therefore, there is a $24,000 deductible temporary difference. Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount 0 = $24,000 - $24,000 + 0 Accrued interest revenue: Mentee presented correct carrying amount of accrued interest revenue $14,000 ($28,000/2). It will not be assembled for tax purpose until it is received in cash. Therefore, there is no deduction amount. There then arises a $14,000 difference between carrying amount and tax base, and the carrying amount < tax base, the difference will be the taxable temporary differences. Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount 0 = $14,000 - $14,000 + 0 Vehicle (net): Mentee presented the carrying amount of vehicle that is wrong. He did not consider the depreciation of the vehicle. Tax has already been deducted for 2 years (2 years at 20% per year). The cost remaining is $60,000-$60,000*20%*2 = $36,000. It will be deducted in the future. Therefore, there is $6,000 temporary deductible difference between carrying amount and tax. Since the carrying amount < tax base, it will give rise to deductible temporary differences and differed tax assets in the future. The future allowable deductions $36,000 will be greater than the future taxable amounts $30,000 and thus less tax will be payable in the future. Carrying amount=Equipment-Accumulated depreciation $30,000 = $60,000 - $30,000 Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount $36,000 = $30,000 - $30,000 + $36,000 Carrying amounts ofasset -Tax bases of asset=Taxable or deductible temporary difference $30,000-$36,000= - $6,000 Machinery (net): Same as above, Mentee did not present the correct carrying amount of machinery. The correct carrying amount for machinery should be $90,000 and it will be assembled in the future. Tax has already been deducted for 5years, the cost remaining 210,000-$210,000*20%*5 = 0. There is no future deductible amount. Therefore, what Mentee presented as $210,000 under future deductible amount is wrong. Since the carrying amount > tax base, this will give rise to a taxable difference and a differed tax liability in the future. Carrying amount=Machinery-Accumulated depreciation $90,000=$210,000-$120,000 Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount $0 = $90,000 - $90,000 + $0 Investment: Mentee presented the correct carrying amount of investment. However, the amount under future taxable amount and future deductible amount was wrong. The expectation is that unless the $250,000 is assessable for the purpose of being taxed, then, it will amount into a loss. In this respect, the above amount should be amenable for future taxation purposes. This amount should be taxable in the future. Additionally, there is a need to pay attention to the fact that the investment costs will be subjected to deduction against any income in the future. Therefore, there’s no difference between carrying amount and tax base. Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount $250,000 = $250,000 - $250,000 + $250,000 Goodwill: Mentee presented the wrong title for this section. The title should be goodwill not building. The carrying amount for goodwill is correct. Tax will not be deducted for goodwill. Hence, there is no future deductible amount. Consequently, there is $50,000 difference between carrying amount and tax base, carrying amount > tax base, it is a taxable temporary difference. Tax Base = Carrying Amount – Future Taxable Amount + Future Deductible Amount 0 = $50,000 - $50,000 + 0 When subjected to the provisions of (para 15), the deferred tax becomes unrecognizable, owing to the fact that if it becomes recognised, the result would be having the amount of goodwill being overstated. However, Good will results in a temporary taxable difference, according to the provisions of AASB 102 (para 21). Therefore, this figure requires to be treated as a deduction from exempt difference, in line with what is shown in the worksheet. 2. Tax Base for Liability: To achieve the Tax Base Liability, the future deductible amount requires to be deducted from the carrying amount (AASB 112, Para 8, Locke, 2012). Accounting payable: Mentee presented the correct carrying amount accounting payable and the correct tax base. Accrual basis is the method is the basis through which accounts payable are realised, therefore meaning that no cash transactions occur. In this respect, no future deductible amount is present. Tax Base = Carrying Amount – Future Deductible Amount $40,000 = $40,000 – 0 Accrued Entertainment expense: Mentee presented the correct carrying amount. However, he presented the entertainment expense under future deductible amount that is wrong. Therefore, the carrying amount becomes liable to be assessed for future taxation purposes. According to AASB 112, accrued expenses are not deductible for taxation purpose. Carrying amount = tax amount, there is no temporary difference. Tax Base = Carrying Amount – Future Deductible Amount $6000 = $6,000 – 0 Provision for warranty: Mentee presented the correct carrying amount. However, there is a need to put into consideration the fact that the provision for warranties are not liable to be deducted for taxation purposes, unless under a situation where there is either payments received or expenses that are incurred in the future. Under this case, there is an expectation that there will be either future payments or expenses that will accrue. Thus, as opposed to the $14,000 indicated under the working sheet, the deductible amount is supposed to be $22,000, owing to the fact that the carrying amount should also equal the deductible amount. Thus, when the accruing warrantees are paid physically, a deductible temporary difference as well as an associated deferred tax amounting to $22,000 will arise in the future, Since carrying amount > tax base. Tax Base = Carrying Amount – Future Deductible Amount 0 = $27,000 - $27,000 Provision for annual leave: Mentee presented the correct carrying amount of $22,000. However, the future deductible amount should be $22,000 as opposed to $15,000. This is because, the provision that is provided for as the annual leave is $22,000, which should also be the same amount of the future amount deductible. Therefore, after this payment is done, a deduction for purposes of taxation will arise, which is then amenable for recording under the future amount deductible. Thus, once the annual leave is paid, there will arise an associated deferred tax asset and a deductible temporary deductible difference of $22, 000, since the carrying amount >tax base. Tax Base = Carrying Amount – Future Deductible Amount 0= $22,000 - $22,000 There is a problem associated with the deferred worksheet that Mentee provided. Since the starting balances and the necessary adjustments were missing, then the worksheet was incomplete. Additionally, the posting that was done by Mentee was wrong. This is because; the final result of posting the correct entries will be a temporary deductible difference worth $55,000 and a $178,000 worth of temporary taxable difference. The other notable problem with the worksheet is the fact that posting of several accounting items such as the deferred tax asset and the deferred tax liability was done in the wrong columns. Such columns should be represented under their respective columns in the worksheet. In this respect, the deferred tax asset is supposed to be $16,500, which is realized through taking the tax rate and then multiplying it by the net temporary difference in the form of (30%*55,000). Similarly, the deferred tax liability in this case should be $38,400, which is obtainable through taking the net temporary difference and then multiplying it by the tax rate in the form of (128,000 * 30%). According to Locke, (2012), the taxable temporary difference does not account for goodwill, as provided for under As per AASB 112 (Para 15). In this respect, the right adjustments should take the form of: Deferred Tax liability $38,400 Deferred Tax asset $16,500 Beginning Balance $(25,0000) $(12,000) Adjustment $13,400 $4,500 XXXX Deferred Tax Worksheet For year ending as at 30th June 2013 Carrying Amount Future Taxable Amount Future Deductible Amount Tax base Taxable Temporary Differences Deductible Temporary Differences $ $ $ $ $ $ Assets Cash 40,000 0 0 40,000 - - Inventory 110,000 (110,000) 110,000 110,000 - - Prepaid insurance 24,000 (24,000) 0 0 24,000 - Accrued interest revenue 14,000 (14,000) 0 0 14,000 - Vehicle (net) 30,000 (30,000) 36,000 36,000 6,000 Machinery (net) 90,000 (90,000) 0 0 90,000 Investment 250,000 (250,000) 250,000 250,000 - - Goodwill 50,000 (50,000) 0 0 50,000 Liabilities Accounts payable 40,000 - 40,000 - - Accrued entertainment expenses 6,000 - 6,000 Provision for annual leave 27,000 (27,000) 0 27,000 Provision for warrantees 22,000 (22,000) 0 22,000 Temporary differences 178,000 55,000 Exempt difs 50,000 0 Net temp. differences 128,000 55,000 Deferred tax liability 38,400 Deferred tax asset 16,500 Beginning balances (25,0000) (12,000) Movement during year Adjustment 13,400 4,500 Read More