Question

Accounting for income tax

Tulip Ltd commenced business on 1 July 2018, with share capital of $700,000.  The following information is available for the year ended 30 June 2019:

Calculation of profit for the year ended 30 June 2019

$

$

Income:

Revenue

1 430 000

Royalty (exempt from income tax)

10 000

Expenses:

Cost of sales

725 000

Advertising expense

204 000

Annual leave expense

24 000

Depreciation – equipment

35 000

Depreciation – motor vehicles

20 000

Doubtful debts expense

14 000

Entertainment (not tax deductible)

2 000

Insurance expense

14 000

Interest expense

17 000

Motor vehicle expenses

3 000

Rent expense

87 000

Repairs and maintenance

6 000

Salaries and wages

298 000

Telephone

5 000

Warranty expenses

18 000

Other expenses

   42 000

 1 514 000

Accounting profit/(loss) before tax

(74 000)

Assets and liabilities as at 30 June 2019

$

$

Assets

Cash

12 000

Inventory

146 000

Accounts receivable

193 000

Less: allowance for doubtful debts

  (12 000)

181 000

Prepaid insurance

3 000

Equipment – cost 

400 000

Less: accumulated depreciation

  (35 000)

365 000

Motor vehicles – cost 

150 000

Less: accumulated depreciation

  (20 000)

  130 000

Total assets

837 000

Liabilities

Accounts payable

4 000 

Bank loan

170 000

Provision for annual leave

22 000

Provision for warranties

   15 000

Total liabilities

211 000

Additional information:

The directors have advised that they did spend a significant amount of money on advertising and salaries and wages during 2019, as Tulip Ltd sought to market the business and its products to consumers.  The directors expect to see significant profits in the next financial year given the success of their advertising campaigns.The company purchased equipment at a cost of $400,000 on 1 July 2018.  The equipment is depreciated over eight years for accounting purposes, and five years for taxation purposes (using the straight-line basis of depreciation, and a residual value of $120,000).  The company purchased motor vehicles at a cost of $150,000 on 1 July 2018.  The motor vehicles are depreciated over six years for accounting purposes, and eight years for taxation purposes (using the straight-line basis of depreciation, and a residual value of $30,000).  Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.The tax rate is 30%.

Required:

i)          Determine the balance of any current tax liability and deferred tax assets and deferred tax liabilities for Tulip Ltd as at 30 June 2019, in accordance with AASB 112.  Use appropriate worksheets and show all necessary workings.

ii)         Prepare the journal entries to record the current tax liability and deferred tax assets and deferred tax liabilities.

Answer 1

NOTES:

Insurance expenses given in the income statement amounting to $14,000 assumed to be fully paid during the year as no accrual is shown on the balance sheet for the same.

There is no adjustment in the sales amount for the tax purpose ,as it is mentioned that sales are taxed at the time sales is made and not on the collection for the same.

Calculation of deferred taxes:

Temporary differences	Tax rate (A)	Timing difference amount (B)	Deferred tax asset (A*B)	Deferred tax liability (A*B)	Net deferred tax asset
Provision for annual leave	30%	22,000	6,600		6,600
Provision for warranties	30%	15,000	4,500		4,500
Allowance for doubtful debts	30%	12,000	3,600		3,600
Depreciation equipment*	30%	21,000		6,300	(6,300)
Depreciation vehicle	30%	5,000	1,500		1,500
Carry forward taxable loss	30%	49,000	14,700		14,700
		1,24,000	30,900	6,300	24,600

	Equipment	Motor vehicle
Book value as per accounting records	3,65,000	1,30,000
Book value as per tax	3,44,000	1,35,000
Timing difference	21,000	(5000)

JOURNAL ENTRY:

Deferred tax asset Dr. 24,600

To income tax expense 24,600

(Being deferred tax asset recognised for the year ended 30 june 2019)