INCOME TAXATION LAW & PRACTICE
TOPIC: TUTORIAL EXERCISES
CAPITAL ALLOWANCES and TRADING STOCK
Depreciation
1. Prepare answers to the following questions:
i) On 1 August 2012 Haulage Ltd purchased a new prime-mover heavy haulage vehicle with a list price of $100,000. Additional costs were:
Stamp duty 5,000
Registration 900
Insurance 750
Dealer's delivery fee 850
The effective life is estimated to be 8 years. The company traded-in an old truck with an adjusted value of $5,000 for an allowance of $7,400.
a) What is the cost of the prime-mover?
b) What is the balancing adjustment on the old truck?
c) Calculate the decline in value of the prime-mover for 2010/11.
d) What would the situation be if Haulage Ltd was a SBE?
2. Explain why it is not possible to make a capital loss [for CGT purposes] on the disposal of depreciated assets (used 100% for income producing purposes).
Trading stock
1. Prepare an answer to the following:
Adam runs an apple orchard. At 30/6/13 he had 300 cartons of apples picked but not sold. In 2012/13 he produced 12,000 cartons of apples. Costs were as follows:
Wages to pickers 30,000
Depreciation of picking machinery 20,000
Machinery fuel (for picking) 6,000
Wages for grading and packing 10,000
Cost of cartons used 8,000
Electricity in packing shed 1,000
Cost of bird-proof nets for trees 15,000
Cost of sprays and fertilizers 5,000
What is the value at 30/6/13 of stock on hand at the ‘cost' option?
2. Explain why it is that although there is no deduction for Cost of Goods Sold under the Acts, there is a deduction for an amount equal to cost of goods sold if opening and closing stock is valued at ‘cost'.
3. [FORMER EXAM QUESTION]
Masher Ltd produces salami sausages. The sausage has a shelf life (or ‘use-by' date) of 12 months after which it is not saleable and must be destroyed. At June 30 2008 Masher has the following stock of sausage on hand:-
- 12,000 items which are within four months of their ‘use by' date, and 500 items which are past their ‘use by' date.
Records from prior years show average sales for the months of July- October, inclusive, are 2,500 items. The salami costs $3 per unit to produce, has a replacement price of $3.50 per unit and a market selling value of $6 per unit.
Required:
Assuming that Masher Ltd wishes to minimise its tax liability for the year, how should it value its stock on hand at the end of the income year? Explain.