Net loss before taxation is ($10,500). A number of items in the profit and loss
ID: 2414464 • Letter: N
Question
Net loss before taxation is ($10,500). A number of items in the profit and loss account have to be treated differently for tax purposes.
Accounting
Records
Taxation
Records
Interest income earned but not yet received
9,000
Nil
Impairment of goodwill
15,000
Nil
Transfer to long service leave provision
8,000
Nil
Depreciation of machinery
20,000
15,000
Transfer to allowance for doubtful debts
4,500
Nil
An extract from the balance sheet at balance day reveals:
Assets
Carrying
Amount
Tax Base
Plant and machinery - at cost
100,000
100,000
Accumulated depreciation
- 20,000
- 15,000
Goodwill (net)
35,000
Nil
Accounts receivable (net)
46,000
50,000
Interest receivable
9,000
Nil
170,000
135,000
Liabilities
Provision for long service leave
5,000
Nil
Additional information:
(1) Income earned $9,000 will not be included into taxable income until it is received.
(2) An item of machinery costing $100,000 is being depreciated using the straight line method at 20% for accounting purpose and at 15% for taxation purposes.
(3) An amount of $3,000 for long service leave paid has been charged against the provision. This amount can now be claimed as a taxation deduction.
(4) A bad debt for $500 has been written off against the allowance for doubtful debts. This amount can now be claimed as a taxation deduction.
(5) Income tax rate is 30%.
Required:
(a) A statement of taxable income.
(b) All necessary general journal entries to record income tax expense and the tax effect of temporary differences. Present your workings for temporary differences in a table
(c) The general journal to transfer income tax expense to profit and loss account.
(d) The general journal entry to transfer net profit after tax to retained earnings.
Use the following format
Net Loss before Taxation
Add
Less
Taxable Income
Carrying Amount
Tax
Base
Deductible Temporary Difference
Taxable Temp. Diff
DTA
DTL
Plant & equipment (at cost)
Accum depn. –
Plant & Equipment
Goodwill (net)
Accounts receivable (net)
Interest receivable
Total assets
Employee provisions
Total liabilities
Net assets
General Journals
Accounting
Records
Taxation
Records
Interest income earned but not yet received
9,000
Nil
Impairment of goodwill
15,000
Nil
Transfer to long service leave provision
8,000
Nil
Depreciation of machinery
20,000
15,000
Transfer to allowance for doubtful debts
4,500
Nil
Explanation / Answer
A. Statement of taxable income: Reason
NET LOSS BEFORE TAXATION ($10,500)
Add: Impairment of Goodwill $ 15,000 not an allowed expenses
Add: Transfer to Long Service Leave Position $ 8,000 not an allowed expenses
Add: Depreciation of Machinery $ 5,000 not an allowed expenses
Add: Transfer to allowance for doubtful debts $4,500 not an allowed expenses
Less: Interest Income not ye received ($9,000) not taxable
Less: actual Bad Debts ($ 500) allowed as deduction
TAXABLE INCOME $12,500 ANSWER