PART A
1) Explain the difference between the 'tax payable' and 'tax effect' methods of accounting for income tax
2) Discuss the 'balance sheet' approach to accounting for income tax required bty Accounting Standard AASB112 Income Taxes, comparing it to the 'income statement' approach adopted under the previous accounting standard.
3) Do you think small companies should have to adopt tax effect accounting as required by Accounting Standard AASB 112 Income Taxes? Provide reasons.
PART B
CASE STUDY
Barnacle Ltd commenced operation on 1 July 2009 and prepared its first financial statements for the year ended 30 June 2010. The following information has been provided for the year ended 30 June 2011
Profit before tax for the year ended 30 June 2011 was calculated as follows:
Gross Profit $ 1380,000
Add:
Rental Revenue 12,000
Less:
Expenses
Long Service Leave 10,000
Depreciation Plant and Equipment 135,000
Salaries and Wages 111,000
Warranty Claims 36,000
Amortisation of Research and Development 180,000
Insurance 18,000
Doubtful Debts Expense 20,000
Other Expenses 370,000
880,000
Profit before tax 512,000
Statement of Financial Position items at 30 June: 2011 2010
Assets
Cash 3,000 25,000
Inventories 142,000 130,000
Accounts Receivable 162,000 140,000
Less Allowance for Doubtful Debts 17000 145,000 (15,000)
Prepaid Insurance 7,000 -
Plant and Equipment 740,000 540,000
Less Accumulated Depreciation 270,000 470,000 (135,000)
Research and Development 600,000 -
Less Accumulated Amortisation 180,000 420,000 -
Deferred Tax Asset ? 24,000
Goodwill (net) 50,000 55,000
1237,000 764,000
Liabilities
Rent Received in Advance 2,000 -
Accounts Payable 290,000 260,000
Provision for Warranty Claims 25,000 20,000
Provision for Long Service Leave 10,000 -
Deferred Tax Liability 60,000 -
Loan Payable 133,000 155,000
520,000 435,000
Net Assets 717,000 329,000
Shareholders Equity
Share Capital 200,000 200,000
Retained Earnings 372,000, 129,000
Asset Revaluation Surplus 140,000
712,000 329,000
Additional Information:
a) Rent revenue is assessable when received in cash
b) Tax deductions for warranty expense are only available when claims are paid
c) Insurance expense is an allowable tax deduction when paid in cash
d) A tax deduction of 125% can be claimed on research and development expenditure paid.
e) There are no accrued salaries and wages at 30 June 2011
f) For accounting purposes Barnacle Ltd. depreciates the cost of Plant and Machinery over four years. For tax purposes Plant and Equipment is depreciated over six years
g) Long Service Leave can only be claimed as a tax deduction when paid to employees.
h) Doubtful debts expense cannot be claimed as a tax deduction until a bad debt is written off.
i) Included in other expenses is an amount of $5000 for goodwill impairment write-off and $3000 for Fines and Penalties.
j) At 30 June 2011 Plant and Machinery was revalued upward by $200,000
The tax rate for the year ended 30 June 2011 is 30%
Required:
Using the methods prescribed by AASB 112 ie the 'balance sheet' approach
- Calculate the taxable income of Barnacle Ltd for the year ended 30 June 2011
- Prepare the Journal entry to record the current tax liability for 2011
- Prepare a deferred tax worksheet for the 2011 year
- Prepare the journal entries to record any deferred tax assets and liabilities at 30 June 2011
PART C
For the year ended 30 June 2012 Barnacle Ltd incurs a loss before income tax of $150,000. Explain how this loss will be treated under the provisions of AASB 112.