Accounting for income tax Snowstorm Ltd, a ski/snowboard sales and hire business, commenced operations on 1 July 2016 and presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position on 30 June 2017. The statements are prepared before considering taxation. The following information is available: Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2017 $ $ Sales revenue - snow/ski equipment 686,000 Hire revenue - snow/ski equipment 140,000 Government grant (exempt income) 20,000 846,000 Expenses: Cost of sales 250,000 Administration expenses 104,000 Doubtful debts expense 5,000 Salaries 260,000 Annual leave 23,000 Warranty expenses 12,000 Depreciation expense - equipment 60,000 Rent expense 26,000 Insurance 40,000 780,000 Accounting profit before tax 66,000 The draft statement of financial position at 30 June 2017 contained the following assets and liabilities: $ Assets: Cash 10,000 Inventory 60,000 Trade receivables 125,000 Less Allowance for doubtful debts (4,000) Prepaid insurance 10,000 Goodwill 20,000 Equipment - cost 300,000 Less Accumulated depreciation (60,000) Liabilities: Trade payables 35,000 Provision for annual leave 20,000 Provision for warranties 10,000 Loan payable 90,000 Additional information: All administration, rent and salaries expenses incurred have been paid as at year end. Tax deductions for annual leave, warranties and insurance are available when the amounts are paid, and not as amounts are accrued. Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off. 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 six years for taxation purposes (straight-line method, and with an estimated residual value of nil). The tax rate is 30%. Required: i) Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings. ii) Prepare the journal entries to record the current tax liability, and deferred tax asset and liability balances at 30 June 2017. iii) Now assume that Sales revenue snow/ski equipment is actually $576,000 (instead of $686,000), and hence accounting profit/(loss) before tax is ($44,000). In addition, Trade receivables is actually $15,000 (instead of $125,000). Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017 in this scenario, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings. Marking Guide Question 3 Max. marks awarded i) Determination of taxable income and current tax liability 6 i) Determination of deferred tax assets and liabilities in deferred tax worksheet 5 ii) Journal entries 2 iii) Determination of taxable income, current tax liability and deferred tax assets and liabilities 4 / 69 Example: deferred tax calculations ABC Ltd Statement of Financial Position (DRAFT) as at 30 June 2016 Assets 2016 Cash 12 000 Accounts receivable 45 000 Less: allowance for doubtful debts (5 000) Inventory 88 000 Interest receivable 5 000 Plant and equipment 100 000 Less: accumulated depreciation (10 000) Goodwill 20 000 Liabilities Accounts payable 26 000 Provision for warranty 32 000 Provision for annual leave 8 900 42