Accounting for income tax
Twinkle Ltd commences operations on 1 July 2013 and presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position on 30 June 2014. The statements are prepared before considering taxation. The following information is available:
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Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2014
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$
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$
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Gross profit
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420,000
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Royalty revenue (exempt income)
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30,000
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Expenses:
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Administration expenses
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75,000
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Salaries
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150,000
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Long service leave
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15,000
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Warranty expenses
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20,000
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Depreciation expense - plant
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80,000
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Insurance
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30,000
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370,000
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Accounting profit before tax
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80,000
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Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2014
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$
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$
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Assets
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Cash
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10,000
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Inventory
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110,000
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Accounts receivable
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40,000
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Prepaid insurance
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15,000
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Goodwill
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20,000
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Plant - cost
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400,000
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Less: accumulated depreciation
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80,000
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320,000
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Total assets
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515,000
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Liabilities
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Accounts payable
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35,000
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Provision for warranty expenses
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10,000
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Loan payable
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225,000
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Provision for long service leave
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15,000
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Total liabilities
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285,000
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Net assets
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230,000
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Other information:
- All administration and salaries expenses incurred have been paid as at year end.
- None of the long service leave expense has actually been paid. It is not deductible until it is actually paid.
- Warranty expenses were accrued and, at year end, actual payments of $10,000 had been made. Deductions are available only when the amounts are paid and not as they are accrued.
- Actual amounts paid for insurance are allowed as a tax deduction.
- Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
- The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes.
- The tax rate is 30%.
Required:
i) Determine the balance of any current and deferred tax assets and liabilities (using appropriate worksheets) as at 30 June 2014, in accordance with AASB 112. Show all necessary workings.
ii) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and liabilities.
iii) What would your answer for part (a) if the following items on the statement of profit or loss and other comprehensive income were changed: 'Gross profit' was $360,000 (instead of $420,000) and the 'Royalty revenue (exempt income)' was $90,000 (instead of $30,000). Show all calculations and necessary workings.