ACC6015

TOPIC FOUR:ACCOUNTING FOR INCOME TAXES

TUTORIAL PRESENTATION WEEK FIVE

Harvey Ltd commences operations on 1 July 2018 and presents its first statement of profit and loss and other comprehensive income for the year ending 30 June 2019 and first statement of financial position as at 30 June 2019.The statements are prepared before considering taxation.

Harvey Ltd

Statement of Profit andLoss and Other Comprehensive Income

for the year ending 30 June 2019

$ $

Gross Profit 122 640

Less Expenses Incurred

Administration 13 440

Salaries 33 600

Long Service Leave 3 360

Warranty 5 040

Depreciation Expense - Plant 13 440

Insurance 3 360 72 240

Accounting Profit Before Tax 50 400

Harvey Ltd

Assets and Liabilities as disclosed in the Statement of Financial Position

as at 30 June 2015

Assets $

Cash 2 360

Accounts Receivable 17 800

Inventory 16 800

Prepaid Insurance 1 680

Equipment- Cost 67 200

Less Accumulated Depreciation 13 440 53 760

TOTAL ASSETS 92 400

Liabilities

Accounts Payable 6 720

Salaries Payable 2 520

Accrued Administration Expenses 4 200

Provision for Long Service Leave 1 000

Provision for Warranty Expenses 3 360

Loan Payable 31 600

TOTAL LIABILITIES 49 400

NET ASSETS 43 000

Additional Information

Long service leave expense was owing as at year end with actual payments amounting to $2 360 (leaving an accrued balance of $1 000).

Salaries expense was owing as at year end with actual payments amounting to a total of $31 080 (leaving an accrued balance of $2 520).

Warranty expenses were accrued and as at year end.Actual payments amounting to $1 680 had been paid (leaving an accrued balance of $3 360).

Administration expenses were owing at year end.Actual payments during the year amounted to $9 240 (leaving an accrued balance of $4 200).

Insurance was initially prepaid to the amount of $5 040.At year end, the unused component of the prepaid insurance amounted to $1 680.

Deductions allowed for taxation purposes are available only when expenses have been paid and not as they are accrued.

Amounts received from sales (including those on credit terms) are taxed at the time the sale is made.

The equipment is depreciated over five years for accounting purposes but over four years for taxation purposes.

The tax rate is 30%.

Required

(i)Calculate the taxable income for the year ending 30 June 2019 showing all calculations.

(ii)Prepare the relevant journal entry to account for current tax consequences for the year ending 30 June 2019 (show workings).

(iii)Using the appropriate formulas, for each of the following assets and liabilities:

1.equipment

2.provision for long service leave

3.prepaid insurance

(a)calculate the tax base

(b)prepare the journal entry to account for any future tax consequences

(c)explain the rationale as to why the temporary difference is treated as either a deferred tax asset or deferred tax liability.