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Question 2


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Question 2

  1. 1. 1 Geelong Ltd began operations on 1 July 2014. One year after operations, the entity presents its first Statement of Comprehensive Income and Statement of Financial Position on 30 June 2015. However, the statements were prepared for internal purposes but income tax calculations were ignored. Accounting profit before income tax for the year 30 June 2015 of Geelong Ltd amounted to $12,410,000, including the following revenue and expenses. Income $ Sales Revenue 21,500,000 Expenses Cost of goods sold 6,100,000 Salaries 820,000 Wages 170,000 Rent of premises 56,000 Administrative expenses 492,200 Entertainment costs 36,000 Doubtful debts 50,000 Long service leave 308,000 Warranty expenses 163,200 Insurance 125,600 Depreciation expense - Plant and Equipment 335,000 Depreciation expense – Vehicles 324,000 Depreciation expense – Buildings 110,000 Profit before Income Tax 12,410,000
  2. 2. 2 Geelong Ltd Assets and Liabilities disclosed in the Statement of Financial Position for the year ended 30 June 2015 $ $ Assets Cash/ Bank 85,000 Accounts Receivables (net) 346,000 Inventory 464,800 Prepaid insurance 43,600 Plants & Equipments – cost 4,020,000 Less - Accumulated depreciation 335,000 3,685,000 Vehicles- cost 1,296,000 Less - Accumulated depreciation 324,000 972,000 Buildings- cost 1,650,000 Less - Accumulated depreciation 110,000 1,540,000 Land 2,250,000 Total assets 9,386,400 Liabilities Accounts payables 851,200 Rent payable 38,000 Provision for warranty expenses 120,200 Provision for long service leave 119,000 Loan payable 1,658,000 Total liabilities 2,786,400 Net assets 6,600,000 Additional information:  The plants & equipments are depreciated over 12 years for accounting purposes, but over 10 years for taxation purposes. The useful life of vehicles is 3 years for the tax purposes and 4 years for accounting purposes. Therefore, there is a temporary difference between accounting and taxation depreciation for plants & equipments, and computers.
  3. 3. 3  Geelong Ltd has some land which cost $1,630,000 and has been re-valued to its fair value of $2,250,000.  All administration, salaries and wages expenses incurred have been paid as at year-end.  Total bad debts written off for the year were $30,000.  The amount of $189,000 long service leave expense has been paid.  Amounts received from sales, including those on credit terms, are taxed at the time of the sale is made.  Warranty expenses were accrued and, at the year-end, actual payments of $43,000 has been made (leaving an accrued balance of $120,200). Deductions for tax purposes are only available when the amounts are paid and not as they accrued.  Insurance was initially prepaid to the amount of $169,200. At the year-end, the unused component of the prepaid insurance amounted to $43,600. Actual amounts paid are allowed as a tax deduction.  Entertainment expenses and depreciation of buildings are not allowed as deductions for income tax.  The tax rate is 30 per cent. Required: (i) Compute the taxable income or loss. (ii) Complete the Taxation Worksheet on the next page in accordance with AASB 112 Income Taxes. (iii) Prepare the applicable journal entries at 30 June 2015 to account for tax using the balance sheet method.
  4. 4. 4 Geelong Ltd Taxation Worksheet as at 30 June 2015 Item Carrying amount $ Tax Base $ Dedctable Temporary Difference $ Taxable Temporary Difference $ Tax Expense $ Revaluation Surplus $ Tax Payable $ Assets Cash/ Bank Receivables (net) Prepaid insurance Inventory Property & Plant – net Vehicles – net Buildings – net Land Liabilities Accounts payables Rent payable Provision for long service leave Provision for warranty Loan payable Net assets Temporary difference for year Loss carried forward Movement for the period Tax effected at 30% Tax on Taxable income Income tax adjustment
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