Valuation Methods for Inventory - Assignment Example

Assignments of the of the QUESTION a. There are different ways to value the inventory of a company. The method which is used for the valuation of inventory either involves assumptions of cash flow which is incorporated into the first in first out and last in first out method. Sometimes the technique of average inventory valuation is used or in certain rare instances the cost of individual inventory is recognized. The method which is chosen to value the inventory of the company in turn affects the amount of taxable income recognized. The various valuation methods for inventory are: Specific identification method Under this method which is one of the most precise methods for the valuation of inventory cost is assigned to each individual units of stock. However this method is applicable only if each unit of the stock can be uniquely identified (Bragg, 2013). For goods which are sold in bulk the preferred method of valuation is either FIFO or LIFO. As compared to LIFO method more tax is charged under FIFO method. There are other methods of valuation too which are available like retail method, direct costing etc. b. In this case it is stated that the debtor took a loan of $18,000 from a creditor which he was unable to pay. So he instead gave to the creditor one of the cars which was located in his showroom and was put for sale at $19000. As the debtor or the taxpayer is personally liable for the loan which is secured by the car under consideration, so possession of the car by the creditor in this case will be considered as a deemed sale in this case (Southern, 2012). However until the process of possession of the property by the creditor is completed no tax liability will fall upon the debtor. This statement is true whether the property under consideration is a business property or a personal property. For purpose of income tax the amount which is considered taxable in this transaction is the lower of the fair market value of the property and the outstanding debt amount at the moment. Thus the amount to be considered in this case is the debt amount of $18,000. C. In this case the care considered was acquired for selling at the showroom. However, since the car has not been sold, and has been taken for personal use of the owner of the company it can be treated as capital loss. Since the vehicle was acquired for a certain amount of cost and in acquiring the car for personal use the owner did not receive any cost so for the income tax purposes the transactions can be treated as capital loss. Capital loss will here refer to the cost of vehicle and is not directly deductible from the income tax but deductible from any other capital gains during this period. d. Fast Ed was selling the cars at a price of $28,000. However since the company has launched new models Fast Ed was forced to sell the models at a price less than the cost price of the model. It was seen that for each of the model which cost his $22,000, he was ready to sell them at $18,000 thus making a loss of $4,000 on each model. Thus for 3 models combined together he made a total loss of $12,000 which would for income tax purposes as a capital losses and will be deductible from the capital gains which he makes in the financial year. Question 2 a. Salary income of $50,000 and a bonus of $10,000 from an employer. When an employee is earning a salary of 50,000 dollars, his tax accessibility is calculated on the following basis Yearly Gross pay 50,000 Deferred retirement tax 0.00 Pre tax 0.00 Exemptions 10,300 Taxable income 39700 Federal income tax 5718.75 State income tax 1791.08 Social security 3100 Medicare 725 Take home 38,599.17 The bonus earned or generated by the employee is generally charged higher as compared to the salary earned by the employee. In order to simplify the tax structure, it is calculated at a flat 25%. The aggregate method is used for calculation of tax on bonus (Bankman, Griffith and Pratt, 2008). b. A prize of $2,000 for the best TV advertisement of the year. The prize received by the employee for the best TV advertisement is included in the gross income. Since according to section 132(a) (4) explains that any sort of fringe benefit which is of minimum value is not included in the gross income. The prize which is in non cash form is not included but cash or a gift in the form of cash is included. Cash is always taxable irrespective of its value or denomination. All sorts of gift cards or gift certificates or prizes provided to an employee are taxable. Prizes valued at large dollar amounts never qualify as de minimis fringe benefits. For determining whether an item is de minimis is required to consider the frequency with which the fringe benefits are provided or offered to the employees by the employer. c. $500 received by an employee from an employer for costs incurred to travel to Sydney for work If a payment made by the employer to the employee for travelling expenses is not more than the reimbursement, the cost of expenses for deduction would be due under Section 337 and that payment is not considered as the earnings under Section 62. Unless the employee is involved in lower paid employment then the payment is treated as earnings under Section 72. The payment for travelling expenses is considered or treated as earnings, and then the director or the employee is entitled for deduction under Section 337 or 338. In the above case the amount of 500 dollars paid by the employer to the employee will not be considered as the earnings. It will be treated as the allowance. This expense is treated as the travelling connivance. The amount that is left over with the employee after the trip is considered as cash in kind provided by the employer to the employee. d. An iphone worth $1,000 from a client. If the employee receives an iphone worth $ 1000 from a client, it will not be included in the gross income of the employee. The utilization of the iphone is for his personal use; therefore it is not subjected to deduction. If the iphone is used for commercial purpose then the expenses will be bear by the company as a benefit. The iphone if offered by the company for official purpose then it will be treated as allowance. Therefore the iphone worth 1000 dollars is not taxable. It is difficult to compute and implement a better method for calculating the tax on the basis on in-kind benefit. e. $10,000 awarded as damages for personal injuries incurred by an individual in a car accident Under Section 79, 101 (a), 105, 106,213, 223 explains that accidental and the death benefit offered or provided to the employee are excluded from the gross income received by the employees from the employer as a source of reimbursement for the medical expenses and also the value of services received by the employees under the health care plan offered by an employer. If the employer purchases the life insurance policy for an individual employee and the employee designates the policy beneficiary, then the value of the life insurance will be treated as an income to the employee. In this case 10000 dollars is excluded from the gross income of the employee. Section 101(a) provides an exclusion from gross income for the life insurance proceeds received by a beneficiary. The accidental benefit awarded to the employee is considered or treated as the accidental or the death benefit provided or offered to the employee (Evans, Freedman and Krever, 2011). f. The share can be offered without brokerage fee or at a discount to the market price of the shares. There may be tax benefit on the number or the amount of share which is traded in the market. But the benefit offered depends on the financial situation and the unique features of the share scheme. Under the employee share scheme, the company is involved in providing employee share scheme interest to its associates or employees. There are various types of schemes related to the tax consequences. The tax payer purchases the share at the worth of 5 dollars which increased to 7.50 dollars therefore the tax benefit will be received by the employee on the worth of 7.50 dollars. g. The amount received by the tax payer from the sale of the stolen television is treated as an income for the taxpayer. But the taxpayer cannot reveal it as the stolen item. The item stolen should have monetary value. If the stolen item did not have monetary value it is not subjected to deduction at all. But the amount of deduction is limited and it may require documentation for receiving the deduction. Tax is not charged on the stolen items and if the money generated from the sale of the stolen item is revealed then no deduction is levied on the amount (Kane, 2014). QUESTION 3 Progressive tax is defined as a tax structure which takes a large percentage from the income of high income earners than it does from the low income earners. In Australia a progressive tax rate is used in order to charge income tax of the individuals. As part of this taxation system individuals are broken down into groups or categories based on the amount of their income which is taxable. That is to say that more a person earns, the more is the amount of tax he has to pay provided that he crosses a cutoff point between the different tax brackets available. The progressive taxation method is thought of an effective method to redistribute income to the society. This is done through the process of taxing the individuals who earn a higher income level at a higher rate and this fund is then used in order fund several social welfare programs whereby poor people who do not earn too much are taken care of. Some critics of this method of taxation consider this method of taxation to be discriminatory and recommend the use of a flat rate of taxation for all the individuals irrespective of income level. According to the critics of this method an alternate basis of taxation which charges uniform tax for all individuals of the society is a more fair method of charging tax. The income tax rate which was applicable in the financial year 2013-14 and was applicable from July 2013 is given in the following figure. As seen from the above figure there is minimum threshold which has been set by the government of Australia at $18,200. People earning below this threshold level of income do not need to file a tax return. The raising of the minimum level has led to freeing up a million people for the financial year 2012-13 from filing a tax return.  QUESTION 4 The person in question over here is considering leaving Australia in order to stay in a foreign country and gain experience in an international accounting firm. In order to work in one of the big international accounting firms he needs to have an experience in an international accounting firm. It is important to note over here that Charles is not married and his parents have already died. He has only one brother who lives in United Kingdom. As per the case it is also evident that when Charles leaves Australia he sells his house in Sydney in order to buy a similar account in UK. Taking these factors into consideration it seems that Charles is not considered as a resident of Australia. There are several factors which has led Australian Tax Office or ATO to arrive at this conclusion. The initial points which are considered in determining the domicile status of Charles was whether he was less than 16 years of age the answer to which was negative. The other factors considered were being a member of CSS or PSS, being an Australian resident for tax purposes before leaving Australia, whether Charles was Permanent or immigrating resident, Country of birth and the country considered to be the home country, Time to spent outside Australia, Being a dependent child or not, Is travelling made with spouse or family members and type of accommodation in the country where Charles will move to. It is understood that Charles will live for less than 183 days in a financial year in Australia and is selling his house in Australia. These factors together negate him of remaining a resident of Australia for the purpose of taxation. Figure 1Residential status (Australian government: Australian tax office. 2015) Question 5 a. Josh owns a boat that his neighbor Ben wants to purchase, but his neighbor wants to try the boat first. Ben, his neighbor decided to purchase the boat. The owner decided that if his neighbor purchased the boat then he will levy higher fees against the purchase price. The main reason behind charging higher fees is to receive the tax benefit, since better tax treatment is received than income earned from selling the boat. Capital gain tax is levied , since capital gain tax is imposed on any capital gains arising from the sale and disposal of the assets acquired or hired. The capital gain tax rate is 20% on the value of the asset but to the extent of the depreciation claimed on the rental property. But the profit derived can be taxed at an ordinary income tax rate. b. Mark acquired an asset on 1st June 2008 for 50,000 dollars and on 29th June 2015 the asset was destroyed due to fire. It is observed that since the asset was not insured therefore Mark will not receive any insurance coverage from the loss. But if the asset was acquired solely for his personal use then the capital gain tax will not be applied because it is not possible to undergo capital gain or loss if it is used only for the personal purpose. Therefore capital gain tax is not levied. If it is considered for personal use then the amount must be subtracted from the cost base in order to find out whether there is an existence of capital gain or not (Phyllis, 2003). C. On 1st June Joe grants Ashleigh an option to purchase his beach house in Bryon bay. Ashleigh agrees to it and pays an amount of 2,000 dollars for the option. The sale of the property involves short term capital gain tax if the particular asset is sold before the completion of three years. Since in this case the offer was made on 1st June 2015, therefore the capital gain tax is levied. If it is sold after three years then it would have been treated as long term capital gain at affixed rate of 20%. But the tax provision provides an exemption for the capital gain received from the sale of the house if the tax payer invests the gain in the residential property within two years from the date of construction of another house (Signore, 2013). d. In this case it is seen that John originally buys the house at a price of $250,000 and sells it at a price of $500,000 there by making a capital gain of $250,000. However in the mean time he rented the place for a year and decides to move in and stays in the property for a period of period of four years (Khadem, 2015). In this respect as per the rules of ATO, he has pay taxes for a quarter of the total capital gain. Thus he has to add an amount of $62500 due to effect of capital gain to the taxable income. Since he has lived in the property for a period of more than 1 year thus he will be able to claim a further deduction of 50%. Thus he will have to pay a CGT on $31250 which will be added to his taxable income. e. Steve purchased his home for $375, 00 on 2005 and started operating the home based business from a separate garage from 2008. Even though he owned his home from the time of acquiring he used it for business purpose before selling. So he would have to pay CGT on the part of his home used for the purpose of business because he had been eligible to claim deduction for interest on money he originally borrowed to buy the home. The garage comprised 20% of the floor space. The tax liability is calculated as follows using the discounted method (Australian tax office, 2015). Profit or gain x Discount rate under CGT = Discounted value of capital gain   percentage of floor area used for office   percentage of ownership period that part of the home was not used as main residence = Taxable capital gain $662,500 X 50% = 331,250   20%   66.66% = $44,162   References Australian government: Australian tax office. (2015). Determination of residency status – leaving Australia. Retrieved from: Australian tax office. (2015). Small business CGT concessions. Retrieved from: Bankman, J., Griffith, T.D. and Pratt, K. (2008). Federal income tax: examples & explanations. New York: Aspen Publishers Online. Bragg, S. M. (2013). Accounting for inventory. Colorado: Accounting Tools. Evans, C., Freedman, J. and Krever, R.E. (2011). Tax, discretion and the rule of law. Netherlands: IBFD. Kane, L. (2014). Heres why your bonus is taxed so high. Retrieved from: < http://www.businessinsider.in/Heres-Why-Your-Bonus-Is-Taxed-So-High/articleshow/45541345.cms >. Khadem, N. (2015). ATO targets rental property and work-related deductions for tax evasion. Retrieved from: Phyllis, L.M. (2003). Tax avoidance and anti-avoidance measures in major developing economies. New York: Greenwood Publishing Group. Signore, L.D. (2013). Understanding how damages are assessed in a personal injury case. Retrieved from: < http://www.siskinds.com/understanding-how-damages-are-assessed-in-a-personal-injury-case/ >. Southern, D. (2012). Taxation of loan relationships and derivative contracts. London: Bloomsbury Professional. Read More