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 the first statement of financial position as of 30 June 2019. The statements are prepared before considering taxation.
Harvey Ltd
Statement of Profit and Loss and Other Comprehensive Income
for the year ending 30 June 2019
$ $
Gross Profit 122 640
Fewer 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 of 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
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QUESTION (cont.)
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 as of 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.