Carl Caldersmith owns 80% of the issued shares of Caldersmith Commercial Cleaning Ltd (CCC), a distributor of cleaning equipment for industrial purposes. During the annual audit of CCC, the firm’s auditors, Standing and Sampson, noticed two irregularities in the accounts and asked Caldersmith to provide reasons for these irregularities.

First, CCC had, in error, been charging GST for the last year on certain equipment sales that were exempt from GST, under the government’s roll-back scheme, as they had been sold to various not-for-profit institutions. Caldersmith, as managing director, claimed that it was impractical and costly to refund the GST collected (approximately \($300\) 000) to these customers. These amounts had been transferred to current year’s profits.

Second, Standing and Sampson noticed that at the beginning of the current year Caldersmith had advanced \($800\) 000 to CCC, at an interest rate of 8% per year. Because of the concerns of bank creditors as to the weak capital position of CCC at year’s end, Caldersmith decided to regard these advances as further capital contributions to CCC, and the \($800\) 000 was recorded as contributed equity. Interest for the current year, totalling \($64\) 000, had been recorded as an expense.

Third, a number of years ago, Caldersmith had purchased and donated to CCC a collection of artworks, which had cost Caldersmith \($800\) 000. CCC had recorded these works in its own records at that price. Caldersmith had these artworks valued by a licensed valuer on 30 June at \($2\) 000 000. CCC passed a journal entry to revalue the artworks and recognise income of \($1\) 200 000.

Required

(a) In the light of the Conceptual Framework, discuss CCC’s treatment in the accounts of the GST overcharge, the treatment of Caldersmith’s advance plus the interest on the advance, and the artworks.